Question

Five years ago a chemical plant invested $72,000 in a pumping station on a nearby river to provide the water required for their production process. Straight-line depreciation is employed for tax purposes, using a 30-year life and zero salvage value. During the past five years, annual operating costs have been as follows:

                                    Maintenance                $1,400

                                    Power and Labor $3,700

                                    Taxes and insurance    $400

A nearby city has offered to purchase the pumping station for $60,000 as it is in the process of developing a city water distribution system. The city is willing to sign a 10-year contract with the plant to provide the plant with its required volume of water for a price of $15,000 per year. Plant officials estimate that the salvage value of the pumping station 10 years hence will be about $20,000. The before-tax MARR is 18 % per year. An effective income tax rate of 50 % is to be assumed. Compare the after-tax equivalent uniform annual cost, EUAC, of the defender (keeping the pumping station) to the challenger (sell station to the city). To answer this problem, calculate the value of the difference in annual costs; EUAC(challenger) – EUAC(defender). (Enter your answer as a number without the dollar $ sign.)

Answer 1