Biotech, a medical imaging and modeling company, must purchase a bone cell analysis system for use by a team of bioengineers and mechanical engineers studying bone density in athletes. This particular part of a 3-year contract with the NBA will provide additional gross income of $100,000 per year. The effective tax rate is 35%.
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Analyzer 1
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Analyzer 2
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First cost, $
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150,000
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225,000
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Operating expenses, $ per year
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30,000
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10,000
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MACRS recovery, years
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5
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5
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a. The Biotech president, who is very tax conscious, wishes to use a criterion of minimizing total taxes incurred over the 3 years of the contract. Which analyzer should be purchased?
b. Assume that after 3 years the company will sell the selected analyzer. Using the same total tax criterion, does either analyzer have an advantage? The selling prices are expected to be $130,000 for analyzer 1 and $225,000 for analyzer 2.