A district officer has to consider two community projects that should be executed before the end of
Question:
A district officer has to consider two community projects that should be executed before the end of 2021. Both plans have a MACRS (GDS)recovery period of five years and effective income tax rate of 40%.
For project A, initial investment needed is RM150,000. The revenues of the project is estimated to be RM50,000 annually with market value ofRM20,000 at the end of useful life of 5 years. Annual operation maintenance cost needed is RM20,000.
On another hand, project B promised annual revenues of RM30,000,
with market value of RM12,000 at the end of its useful life of 7 years.This project
need a capital investment of RM100,000 and annual operation maintenance cost of RM10,000.
i) If the after-tax desired return on investment is 12% per year, suggest the suitable plan for the company. Give your reason for this selection.
ii) What is the simple payback period based on after-tax cash flow of the chosen equipment ?
ANSWER (i)
PROJECT A
ATCF TABLE
MV-BV =
PW(12%) =
AW(12%) =
PROJECT B
ATCF TABLE
MV-BV =
PW(12%) =
AW(12%) =
Which one is chosen? Give your reason for this selection :
ANSWER (ii)
What is the simple payback period based on after-tax cash flow of the chosen equipment ?
Engineering Economy
ISBN: 978-0133439274
16th edition
Authors: William G. Sullivan, Elin M. Wicks, C. Patrick Koelling