You are the owner of a factory located in a hot tropical

climate. The monthly production of the factory is $$100,000$ ?except

during June$?$ ?September, when it falls to $$80,000$ ?due to the heat in

the factory. In January $2017,$ ?you get an offer to install an air$-$

conditioning system in your factory. The cost of the air$-$

conditioning system is $$150,000,$ ?and its expected life span is $10$

years. If you install the air$-$ ?conditioning system, the production

in the summer months will equal the production in the winter

months. However, the cost of operating the air$-$ ?conditioning system

is $$9,000$ ?per month $($only in the $4$ ?months that you operate the

system$).$ ?You will also need to pay a maintenance fee of $$5,000$

annually in October. Also assume that the depreciation costs are

recognized in December of each year and that taxes are paid in

December of each year. The depreciation is straight$-$ ?line to

salvage value zero $($which is also the anticipated terminal

value$).$a$.$ ?What is the December equivalent pre$-$ ?tax and pre$-$

depreciation annual profits?b$.$ ?What is the NPV of purchasing the air$-$ ?conditioning system if

the discount rate is $12\%$ ?and corporate tax rate is $35\%?$

Transcribed Image Text:

1 A B C AIR CONDITIONING SYSTEM 2 Discount rate 12% 3 Corporate tax 35% 4 Air conditioner cost 5 Air conditioner life span 150,000 10 6 Air conditional annual depreciation 15,000 #NAME? 7 Air conditioner operating cost (June-September) 1 A B C AIR CONDITIONING SYSTEM 2 Discount rate 12% 3 Corporate tax 35% 4 Air conditioner cost 5 Air conditioner life span 150,000 10 6 Air conditional annual depreciation 15,000 #NAME? 7 Air conditioner operating cost (June-September)