Question

Your company has just signed a? three-year nonrenewable contract with the city of New Orleans for earthmoving work. You are investigating the purchase of heavy construction equipment for this job. The equipment costs $203,000 and qualifies for? five-year MACRS depreciation. At the end of the? three-year contract, you expect to be able to sell the equipment for $71,000. If the projected operating expense for the equipment is $60,000 per? year, what is the? after-tax equivalent uniform annual cost? (EUAC) of owning and operating this? equipment? The effective income tax rate is 37?%, and the? after-tax MARR is 13?% per year.

Answer 1

Present worth = Cost / ((1 + MARR) ^ number of periods)

Net Present Worth = Sum of the present worth of all the costs

EUAC = NPW x MARR / (1 - ((1 + MARR) ^-number of periods))

Year	Cost	Depreciation	Tax Savings	After tax cost	MARR	PW	NPW
0	$203,000.00			$203,000.00	0.13	$203,000.00	$323,383.30
1	$60,000.00	$40,600.00	$15,022.00	$44,978.00	0.13	$39,803.54
2	$60,000.00	$64,960.00	$24,035.20	$35,964.80	0.13	$28,165.71	EUAC
3	$60,000.00	$38,976.00	$14,421.12	$45,578.88	0.13	$31,588.45	$91,942.57
4	$60,000.00	$23,385.60	$8,652.67	$51,347.33	0.13	$31,492.28
5	-$11,000.00	$23,385.60	$8,652.67	-$19,652.67	0.13	-$10,666.68