Ans.
a)
Option 1 : Sell the newer machine & keep the older machine (with tax)
Years | 0 | 1 | 2 | 3 | 4 | 5 |
Proceeds from sale of old machine | 69,500.00 | |||||
Tax on gain @ 35% | (24,325.00) | |||||
Operating costs (new machine) | (34,900.00) | (34,900.00) | (34,900.00) | (34,900.00) | (34,900.00) | |
Overhaul expense | (26,500.00) | |||||
Proceeds from sale of new machine | 6,950.00 | |||||
Tax on gain @35% | 2,432.50 | |||||
Cash Flow | 18,675.00 | (34,900.00) | (34,900.00) | (34,900.00) | (34,900.00) | (25,517.50) |
PV factor @ 13% | 1 | 0.8849558 | 0.7831467 | 0.6930502 | 0.6133187 | 0.5427599 |
Present Value | 18,675.00 | (30,884.96) | (27,331.82) | (24,187.45) | (21,404.82) | (13,849.88) |
Net Present Value | (98,983.93) |
Equivalent Annual Cost (EAC) for 5 years
Present Value = EAC1 * PVAF @ 13% for 5 years
$98,983.93 = EAC1 * 3.5172313
EAC1 = $ 98,983.93 / 3.5172313 = $ 28,142.57
Option 2 : Sell the older machine & keep the newer machine (with tax)
Years | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
Proceeds from sale of old machine | 26,300.00 | ||||||||||
Tax on gain @ 35% | (9,205.00) | ||||||||||
Operating costs (new machine) | (20,600.00) | (20,600.00) | (20,600.00) | (20,600.00) | (20,600.00) | (31,300.00) | (31,300.00) | (31,300.00) | (31,300.00) | (31,300.00) | |
Overhaul expense | (18,700.00) | ||||||||||
Proceeds from sale of new machine | 6,950.00 | ||||||||||
Tax on gain @35% | (2,432.50) | ||||||||||
Cash Flow | 17,095.00 | (20,600.00) | (20,600.00) | (20,600.00) | (20,600.00) | (39,300.00) | (31,300.00) | (31,300.00) | (31,300.00) | (31,300.00) | (26,782.50) |
PV factor @ 13% | 1 | 0.8849558 | 0.7831467 | 0.6930502 | 0.6133187 | 0.5427599 | 0.4803185 | 0.4250606 | 0.3761599 | 0.3328848 | 0.2945883 |
Present Value | 17,095.00 | (18,230.09) | (16,132.82) | (14,276.83) | (12,634.37) | (21,330.47) | (15,033.97) | (13,304.40) | (11,773.80) | (10,419.30) | (7,889.81) |
Net Present Value | (123,930.85) |
Equivalent Annual Cost (EAC) for 10 years
Present Value = EAC1 * PVAF @ 13% for 10 years
$123,930.85 = EAC1 * 5.4262435
EAC1 = $123,930.85 / 5.4262435 = $ 22,839.16
b)
Which machine should united automation sell?
Sell the old machine.
Reason being the Equivalent Annual Cost is low.
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