Question

The Fairmont Hotel in San Francisco needs to replace its air conditioning system. There are two...

The Fairmont Hotel in San Francisco needs to replace its air conditioning system. There are two alternatives, both of which can do the job equally well:

Machine name AC 1 AC 2
Purchase price $40,000 $60,000
Operating cost (end of each year) $17,000 $8,000
Useful life (years) 4 6
Straight line depreciation to zero over (years) 4 6
Salvage value at end of useful life $0 $0

The relevant discount rate is 10% and the marginal tax rate is 35%.

What is the equivalent annual cost for AC 1 (in absolute terms)?
What is the operating cash flow for AC 2 per year?
What is the equivalent annual cost for AC 2 (in absolute terms)?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1
Machine name AC1 AC2
Purchase price 40000 60000
Operating cost per year (A) 17000 8000
Depreciation per year 10000 (40000/4) 10000(60000/6)
Tax savings on Depreciation (B) 3500 (10000x35%) 3500(10000x35%)
Cash outflow (A) -( B) 13500 4500
Present value annuity factor @10% , for 4 yar and 6 year 3.169 4.354
Present value of Cash flow 42781.5 (13500x3.169) 19593
Total Present value of cash outflow 82781.5 (40000+42781.5) 79593 (60000+19593)
Equalent Annual cost 26122.27 (82781.5/3.169) 18280.43

Now the answers

EAC of AC1 = 26122.27

Operating Cash flow of AC2 per year = 4500

EAC of AC2 = 18280.43

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The Fairmont Hotel in San Francisco needs to replace its air conditioning system. There are two...
The Fairmont Hotel in San Francisco needs to replace its air conditioning system. There are two alternatives, both of which can do the job equally well: Machine name AC 1 AC 2 Purchase price $40,000 $60,000 Operating cost (end of each year) $18,000 $8,000 Useful life (years) 4 5 Straight line depreciation to zero over (years) 4 5 Salvage value at end of useful life $0 $0 The relevant discount rate is 10% and the marginal tax rate is 35%....
Blooper Industries must replace its magnoosium purification system. Quick & Dirty Systems sells a relatively cheap...
Blooper Industries must replace its magnoosium purification system. Quick & Dirty Systems sells a relatively cheap purification system for $25 million. The system will last 5 years. Do-It-Right sells a sturdier but more expensive system for $28 million; it will last for 7 years. Both systems entail $3 million in operating costs; both will be depreciated straight-line to a final value of zero over their useful lives; neither will have any salvage value at the end of its life. The...
A firm has two alternatives for the improvement of its current production system. The data are...
A firm has two alternatives for the improvement of its current production system. The data are as follows: Machine A                                                                 Machine B First Cost – P6M First cost – P8,661,485 Annual operating cost – P250T Annual operating cost – P252,618 Service life – 4 years                                                  Service life – 6 years Salvage value – P150T Salvage value – P100,424 Using the Annual Equivalent Cost (AEC) Method and with the firm’s interest rate of 23% cpd. annually, what the AEC of Machine B?
Blooper Industries must replace its magnoosium purification system. Quick & Dirty Systems sells a relatively cheap...
Blooper Industries must replace its magnoosium purification system. Quick & Dirty Systems sells a relatively cheap purification system for $12 million. The system will last 4 years. Do-It-Right sells a sturdier but more expensive system for $13 million; it will last for 5 years. Both systems entail $2 million in operating costs; both will be depreciated straight-line to a final value of zero over their useful lives; neither will have any salvage value at the end of its life. The...
Two types of power converters are being considered for a specific application. You want to make...
Two types of power converters are being considered for a specific application. You want to make a comparison using a 15 percent interest rate and you have the following information: Alternative Alpha Omega Purchase price $ 10,000 $ 20,000 Estimated useful life 5 years 9 years Residual value $ 1000 $ 5000 Annual cost of operation $ 2,600 $ 1,300 to. Determine the annual equivalent cost of both alternatives. (10pts) b. Using a useful life of 6 years, determine the...
Two types of power converters are being considered for a specific application. You want to make...
Two types of power converters are being considered for a specific application. You want to make a comparison using a 15 percent interest rate and you have the following information: Alternative Alpha Omega Purchase Price 10,000 20,000 Estimate useful life 5 years 9 years Salvage Value 1,000 5,000 Anual operation cost 2,600 1,300 a. Determine the annual equivalent cost of both alternatives. b. Using a useful life of 6 years, determine the present value of both alternatives if the residual...
The Thunderbird Winery must replace its present grape pressing equipment. Two alternatives are under consideration, the...
The Thunderbird Winery must replace its present grape pressing equipment. Two alternatives are under consideration, the Quick-Skwish and the Stomp-Master. The Thunderbird Winery has a Minimum Attractive Rate of Return of 4%. Which machine should be chosen? (use NPW Method and draw a cash flow diagram) Quick-Skwish Stomp-Master Initial Cost $250,000 $400,000 1st Year Operating Expense $ 18,000 $ 12,500 Operating Expense Gradient (begins in year 2) $2000 $1,000 Salvage Value $ 25,000 $ 40,000 Useful Life (years)           5...
Bridgeport Fashions needs to replace a beltloop attacher that currently costs the company $34,000 in annual...
Bridgeport Fashions needs to replace a beltloop attacher that currently costs the company $34,000 in annual cash operating costs. This machine is of no use to another company, but it could be sold as scrap for $2,160. Managers have identified a potential replacement machine, Euromat’s Model HD-435. The HD-435 is priced at $64,104 and would cost Bridgeport Fashions $24,000 in annual cash operating costs. The machine has a useful life of 12 years, and it is not expected to have...
James Thomas, the accounting supervisor of Liberty Hotel, is considering the purchase of a computer system...
James Thomas, the accounting supervisor of Liberty Hotel, is considering the purchase of a computer system for the back office. Two alternatives are being considered as follows: A B Cost $10,000 $12,000 Salvage value $1,000 $2,000 Expected useful life 3 years 3 years Utilities (annual) $1,000 $800 Operator labor (annual) $25,000 $25,000 Repairs (annual) $1,000 $900 Supplies (annual) $2,000 $2,000 Required: 1. Which costs are sunk? 2. Which costs are irrelevant? 3. Prepare a comparative cost analysis for the two...
Barry Boswell is a financial analyst for Dossman Metal? Works, Inc. and he is analyzing two...
Barry Boswell is a financial analyst for Dossman Metal? Works, Inc. and he is analyzing two alternative configurations for the? firm's new plasma cutter shop. The two? alternatives, denoted A and B? below, will perform the same? task, but alternative A will cost $75,000to? purchase, while alternative B will cost only $ 50,000. ?Moreover, the two alternatives will have very different cash flows and useful lives. The? after-tax costs for the two projects are as? follows: Year   Alternative A   Alternative...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT