The Ajax Corporation purchased a railroad tank car 8 years ago for $60,000. It is being depreciated by SOYD depreciation, assuming a 10-year depreciable life and a $7000 salvage value. The tank car needs to be reconditioned now at a cost of $35,000. If this is done, it is estimated the equipment will last for 10 more years and have a $10,000 salvage value at the end of the 10 years.
On the other hand, the existing tank car could be sold now for $10,000 and a new tank car purchased for $85,000. The new tank car would be depreciated by MACRS depreciation. Its estimated actual salvage value would be $15,000. In addition, the new tank car would save $7000 per year in maintenance costs, compared to the reconditioned tank car.
Based on a 15% before-tax rate of return, determine whether the existing tank car should be reconditioned or a new one purchased. (The problem statement provides more data than are needed, which is typical of real situations.) (Answer: Recondition the old tank car.)