1. A profitable company making earth-moving equipment is considering an investment of $100,000 on equipment, which will have a 5-year useful life and, no salvage value. If money is worth 10%, which one of the following three methods of depreciation would be preferable?
a. Straight - line method
b. SOYD method
c. MACRS method
2. The initial cost of the office equipment is $100,000 has an estimated actual life of 6 years, with an estimated salvage value of $10000. Prepare tables listing the annual costs of depreciation and the book value at the end of each 6 years, based on straight-line, sum-of-years'-digits, and MACRS depreciation. Use spreadsheet functions for the depreciation methods.
3. A company bought a small vessel for $550,000; it is to be depreciated by MACRS depreciation. When requirements changed suddenly. The chemical company leased the vessel to an oil company for 6 years at $100,000 per year. The lease also provided that the oil company could buy the vessel at the end of 6 years for $350,000. At the end of the 6 years, the oil company exercised its option and bought the vessel. The chemical company has a 34% combined incremental tax rate. Compute its after-tax rate of return on the vessel. Do this problem assuming that a $250,000 Section 179 deduction applies. Please use Excel to provide your answer.
4. A machine was installed 5 years ago. Its market value is now $15,000 and is expected to decline by 10%/year over the next five years. It is projected that this machine will be operational for another five years, after which time it will be scrapped (no salvage value). This year, its annual costs are estimated as $1500, but will increase by $1000/year thereafter. A new machine is now available for $20,000. It has no annual costs over its five-year minimum cost life (i.e., economic life). Using an 8% MARR, when (if at all) should the existing machine be replaced with the new machine?
5. Calculate by hand first and use excel) An injection molding machine has a first cost of $1,050,000 and a salvage value of $225,000 whenever the machine is sold. The yearly maintenance and operating costs are $235,000 with a gradient of $75,000. The MARR is 10%. What is the economic life?
6. The Quick Manufacturing Co., a large profitable corporation, is considering the replacement of a production machine tool (the defender). A new machine (the challenger) would cost $15,000, have a 5-year useful life and be in the 5-year MACRS property class. The challenger will have a $0 salvage value at the end of five years. For tax purposes, MACRS depreciation would be used. The defender was purchased four years ago at a cost of $9,000. The defender has been depreciated using SOYD depreciation using a 9-year life and a $0 salvage value. The defender can be sold for $5,000 at the present time, or it can be used "as is" for five more years. If the defender is used for five more years, its salvage value will be $0. The challenger will have an annual operating cost that is $2,500 less than that of the defender. Determine the present worth of the yearly after-tax costs of owning the defender. Use an aftertax minimum attractive rate of return of 12% and a combined state and federal income tax rate of 45%.
7. Five years ago, Mary purchased some new automated packing equipment having a first cost of $125,000 and a MACRS class life of 7 years. The annual costs for operating, maintenance, and insurance, as well as market value data for each year of the equipment's 10-year useful life are as follows.
|
Year
n
|
Annual Costs in Year n for
|
Market
Value in
Year n
|
|
Operating
|
Maintenance
|
Insurance
|
|
1
|
$16,000
|
$5,000
|
$17,000
|
$80,000
|
|
2
|
20,000
|
10,000
|
16,000
|
78,000
|
|
3
|
24,000
|
15,000
|
15,000
|
76,000
|
|
4
|
28,000
|
20,000
|
14,000
|
74,000
|
|
5
|
32,000
|
25,000
|
12,000
|
72,000
|
|
6
|
36,000
|
30,000
|
11,000
|
70,000
|
|
7
|
40,000
|
35,000
|
10,000
|
68,000
|
|
8
|
44,000
|
40,000
|
10,000
|
66,000
|
|
9
|
48,000
|
45,000
|
10,000
|
64,000
|
|
10
|
52,000
|
50,000
|
10,000
|
62,000
|
Now Mary is looking at the remaining 5 years of her investment in this equipment, which she had initially evaluated on the basis of an after-tax MARR of 25% and a tax rate of 35%. Assume that the replacement repeatability assumption are valid. Determine the after-tax lowest EUAC of the equipment. Please use EXCEL to provide your answer.
8. A hospital would replace five personnel that currently cover three shifts per day. 365 days per year. Each person earns $35,000 per year. Company-paid benefits and overhead are 45% of wages. Money costs 8% after income taxes. Combined federal and state income taxes are 40%. Annual property taxes and maintenance are 2.5 and 4% of investment, respectively. Depreciation is 15-year straight line. Disregarding inflation, how large an investment in the automation project can be economically justified?