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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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