Question

Two investments involving a virtual mold apparatus for producing dental crowns qualify for different property classes. Investment A has a cost of $58,500.00, lasts 9 years with no salvage value, and costs $150,000 per year in operating expenses. It is in the 3-year property class. Investment B has a cost of $86,500.00, lasts 9 years with no salvage value, and costs $125,000 per year. Investment B, however, is in the 7-year property class. The company marginal tax rate is 40%, and MARR is an after-tax 10%. Based upon the use of MACRS-GDS depreciation, compare the AW of each alternative.

AWA = $

AWB = $

Which should be selected? (Investment A; Investment B)

What must be Investment B's cost of operating expenses for these two investments to be equivalent? $

Answer 1

The annual worth formula = (r * NPV)/ [ 1- (1+r)^-t] ; where r is the applicable discount rate, t is the time period. We will first calculate the NPV of each of the two options:

Now we can calculate the Annual Worth of each option:

AW A = [10% * 606023.6] / [1 - (1+10%)^-9] = 105230.3

AW B = [10% * 555870] / [1 - (1+10%)^-9] = 96521.57

Hence option B should be chosen. For the investments to be similar, we basically look at the oprating cost for option B which will equate its NPV to same as Option A NPV. We can use the above worksheet prepared in excel to arrive at the operating cost for option B which will increase the NPV (of costs) to same as option A. When we do the numbers the operating cost should increase to $139514.50. At this level of operating costs, the NPV will be same and hence the annual worth will also be same.