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## Finance

 Basic Finance Corporate Finance Financial Management Financial Econometrics Portfolio Management Risk Management Public Finance Business Law & Ethics

problem: Kaufman Chemical is estimating the buy of a new multistage centrifugal compressor for its wastewater treatment operation which costs \$750,000 & requires \$57,000 to install. This outlay would be partially offset by the sale of an existing compressor originally purchased 5 years ago for dollar 490,000. It is being depreciated using a 5year recovery schedule under ACRS & can currently be sold for dollar 150,000. The existing compressor's maintenance costs are raising, & the new compressor could decrease operating costs before depreciation & taxes by \$280,000 yearly for the next five years. The new equipment will be depreciated under a 5 year recovery schedule using ACRS [schedule given below]. The firm has an 18 percent cost of capital and a 40 percent tax of ordinary and capital gain income.

Estimate whether Kaufman Chemical should replace its existing wastewater treatment equipment with the new compressor. [Do not consider the terminal price of the new compressor in your analysis.]

 Year Depreciation of  Existing Equipment Depreciation  of New Equipment Incremental Depreciation 1 0.05 ´ \$490,000 = \$24,500 0.20 ´ \$807,000 = \$161,400 \$136,900 2 0 0.32 ´ \$807,000 = 258,240 258,240 3 0 0.19 ´ \$807,000 = 153,330 153,330 4 0 0.12 ´ \$807,000 = 96,840 96,840 5 0 0.12 ´ \$807,000 = 96,840 96,840 6 0 0.05 ´ \$907,000 = 40,350 40,350

Basic Finance, Finance

• Category:- Basic Finance
• Reference No.:- M918102

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