Five years ago, an airline installed a baggage conveyor system in a terminal, knowing that within...
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Five years ago, an airline installed a baggage conveyor system in a terminal, knowing that within a few years it would have to be moved. The original cost of the installation was $120,000, and through accelerated depreciation methods the company has been able to depreciate the entire cost. It now finds that it will cost $40,000 to move and upgrade the conveyor. This additional cost would be depreciated over the next six years using straight-line depreciation, which the airline believes is a good estimate of the remaining useful life of the system if moved. As an alternative, the airline finds that it can purchase a somewhat more efficient conveyor system for an installed cost of $120,000. The new system would result in an estimated reduction in annual expenses of $6,000 in year-zero dollars. Annual expenses are expected to increase by 6% per year. The new system will also be depreciated in a straight line, and its estimated MV six years from now, in year-zero dollars, is 50% of its installed cost. This MV is estimated to increase by 3% per year. A small airline company, which will occupy the present space, has offered to buy the old conveyor for $90,000. Annual property taxes and insurance on the present equipment have been $1,500, but it is estimated that they would increase to $1,800 if the equipment is moved and upgraded. For the new system, it is estimated that these costs would be about $2,750 per year. All other expenses would be about equal for the two alternatives. The company is in the 40% income tax bracket. It wishes to obtain a return of at least 10% per year, after taxes, on any invested capital. What would you recommend? Five years ago, an airline installed a baggage conveyor system in a terminal, knowing that within a few years it would have to be moved. The original cost of the installation was $120,000, and through accelerated depreciation methods the company has been able to depreciate the entire cost. It now finds that it will cost $40,000 to move and upgrade the conveyor. This additional cost would be depreciated over the next six years using straight-line depreciation, which the airline believes is a good estimate of the remaining useful life of the system if moved. As an alternative, the airline finds that it can purchase a somewhat more efficient conveyor system for an installed cost of $120,000. The new system would result in an estimated reduction in annual expenses of $6,000 in year-zero dollars. Annual expenses are expected to increase by 6% per year. The new system will also be depreciated in a straight line, and its estimated MV six years from now, in year-zero dollars, is 50% of its installed cost. This MV is estimated to increase by 3% per year. A small airline company, which will occupy the present space, has offered to buy the old conveyor for $90,000. Annual property taxes and insurance on the present equipment have been $1,500, but it is estimated that they would increase to $1,800 if the equipment is moved and upgraded. For the new system, it is estimated that these costs would be about $2,750 per year. All other expenses would be about equal for the two alternatives. The company is in the 40% income tax bracket. It wishes to obtain a return of at least 10% per year, after taxes, on any invested capital. What would you recommend?
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I would recommend that the airline purchase the new conveyor s... View the full answer
Related Book For
Engineering Economy
ISBN: 978-0132554909
15th edition
Authors: William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Posted Date:
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