Question

a) determine which machine should be purchased, based on equivalent uniform annual cost.

b) what would be the MACRS depreciation in the third year for machine II?

11-44 A company is considering buying a new piece of machinery. A 10% interest rate will be used in the computations. Two models of the machine are available. sloboibos trolinis ob hoi Machine | Machine II Initial cost odos $100,000 le 25,000 $80,000 od 000. End-of-useful-life 20,000 salvage value, s Annual operating 18,000 cost and 001: o la d in as 00062 yg or bad si o lio isubong to Sarwoll Useful life, in years 20 ACRS class 7 yr 15,000 first 10 years 20,000 20 thereafter 2 5 7 yr CODE

Answer 1

In the given question, In order to decide which machine should be bought, we will compute cost of each machine and divide it with Equivalent Annual factor

Depreciation has no role to play in part one as no information about tax is given and role of depreciation is to save tax

for Machine 1 :

Initial cost - $ 80000

Annual cost - $ 18000 for 20 years

Present value of annual cost - $ 18000 * 8.51 (PVIFA) = $ 153180

Total cost - $ 233180

Present value of salvage value = 20000/(1/1.10)^20 = 20000*1.4864 = $ 2972

Total cost of machine 1 = 233180-2972 = $ 230207

Equivalent annual present factor (EVPFA) for 20 years = 9.51

Equivalent annual cost = 230207/9.51 = $ 24206

for Machine 2 :

Initial cost - $ 100000

Annual cost - $ 15000 for 10 years and 20000 thereafter

Present value of annual cost -

For first 10 years = $ 15000 * 6.144 (PVIFA) = 92160

for next 15 years = $ 20000 * 2.932 = $ 58640

Total cost = $ 250800

Present value of salvage value = 25000/(1/1.10)^25 = 25000*0.09226 = $ 2307.4

Total cost of machine 1 = 250800-2307 = $ 248492

Equivalent annual present factor (EVPFA) for 25 years = 10.077

Equivalent annual cost = 248492/10.077 = $ 24659

Since cost for Machine one is less, it is recommended to be purchased