A firm is considering two different methods of solving a production problem. Both methods are expected to

Question:

A firm is considering two different methods of solving a production problem. Both methods are expected to be obsolete in six years. Method A would cost $80,000 initially and have annual operating costs of $22,000. Method B would cost $52,000 initially and have annual operating costs of $17,000. The salvage value realized with Method A would be $20,000 and with Method B would be $15,000. Method A would generate $16,000 of revenue a year more than Method B. Investments in both methods depreciate as a five‐year MACRS property class. The firm’s marginal income-tax rate is 40%. The firm’s MARR is 20%. What would be the required additional annual revenue for Method A so the firm would be indifferent in its choice of method?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... MARR
Minimum Acceptable Rate of Return (MARR), or hurdle rate is the minimum rate of return on a project a manager or company is willing to accept before starting a project, given its risk and the opportunity cost of forgoing other...

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