The Quick Manufacturing Company, a large profitable corporation, is considering the replacement of a production machine tool. A new machine would cost $3700, have a 4- year useful and depreciable life, and have no salvage value. For tax purposes , sum of years' digits depreciation would be used. The existing machine tool was purchased 4 years ago at a cost of $4000 and has been depreciated by straightline depreciation assuming an 8 year life and no salvage value. The tool could be sold now to a used equipment dealer for $1000 or be kept in service for another 4 years. It would then have no salvage value. The new machine tool would save about $900 per year in operating costs compared to the existing machine. Assume a 40% combined state and federal tax rate.
A Replacement Analysis based on Annual Equivalent of Cash Flow After Taxes MUST be conducted. Assume i=10%% and there is a 4 years plan of study for both the challenger and defender in this case. I have what the answers should be but I'd like to see how it's done correctly..
Annual Equivalent of Defender (keeping equipment) should be - $242
Annual Equivalent of Challenger (buying new equipment) should be -$239