Question

***** please show excel calculations *******

A specialty concrete mixer used in construction was purchased for $300,000 7 years ago. It is MACRS-GDS 5-year property. Its annual O&M costs are $105,000. At the end of an 8-year planning horizon, the mixer will have a salvage value of $5,000. If the mixer is replaced, a new mixer will require an initial investment of $375,000, and at the end of the 8-year planning horizon, the new mixer will have a salvage value of $45,000. Its annual O&M cost will be only $40,000 due to newer technology. Use an EUAC measure, a tax rate of 40 percent, and an after-tax MARR of 9 percent to perform an after-tax analysis to see if the concrete mixer should be replaced if the old mixer is sold for its market value of $65,000.

a. Use the cash flow approach (insider’s viewpoint approach). (11.2.2)

Answer 1

(a)
MARKET VALUE = $65,000

ANNUAL,O&M COST = $105,000

SALVAGE VALUE IN 8 YEARS = $5,000

REMAINING LIFE = 8

MARR = 15%

EUAC=105000-5000(A|F 15%,8)%3D

EUAC=105000-5000(0.07285)= $104,635.75

REPLACE WITH NEW SPECIALTY CONCRETE MIXER FIRST COST = $375,000

ANNUAL O&M COST = $40,000

SALVAGE VALUE IN 8 YEARS = $45,000

REMAINING LIFE = 8

MARR = 15%

EUAC=(375000-65000)(A|P 15%,8)[phone](A|F 15%,8)

=310000(0.22285)[phone] (0.07285)3

= $105,805.25

$104,635.75 < $105,805.25

Decision: Keep existing Concrete mixer