A major bakery-cafe chain is evaluating whether they should consolidate its two offices into one location when the two leases expire. In addition, the company also needs to decide if they want to purchase or lease the new location. The estimated costs for these three alternatives are as follows:
Alternative Continue Leasing Separate Offices Lease Combined Office Purchase Combined Office
Initial costs - - $270,000
Annual lease $53,550 $63,000 -
Annual maintenance costs - - $6000
Lease period 4 12 -
Market value at the end of year 12 - - $216,000
Which alternative should be selected based on the annual worth method? Use a MARR of 11% and a study period of 12 year(s).
A low-cost airline operating in South Africa is considering adding either Boeing 737-400 or Boeing 737-800 to its fleet. The following information is prepared for the economic evaluation. Either aircraft is to be used for 5 years and sold for the estimated salvage value. Assume the double declining balance is used for tax purposes in this country and the airline's before-tax MARR is 6.00% per year and the effective tax rate is 35%. Select a machine on the basis of after-tax present worth analysis.
Alternative 737-400 737-800
First costs $390,000 $475,000
Annual benefits $330,000 $405,000
Salvage value $234,000 $234,000
Life, years 8 10