Question

As a result of improvements in product engineering, United Automation is able to sell one of its two milling machines. Both machines perform the same function but differ in age. The newer machine could be sold today for $60,500. Its operating costs are $21,400 a year, but at the end of five years, the machine will require a $19,300 overhaul (which is tax deductible). Thereafter, operating costs will be $30,700 until the machine is finally sold in year 10 for $6,050. The older machine could be sold today for $25,700. If it is kept, it will need an immediate $23,500 (tax-deductible) overhaul. Thereafter, operating costs will be $32,800 a year until the machine is finally sold in year 5 for $6,050. Both machines are fully depreciated for tax purposes. The company pays tax at 21%. Cash flows have been forecasted in real terms. The real cost of capital is 11%. a. Calculate the equivalent annual costs for selling the new machine and for selling the old machine. (Do not round intermediate calculations. Enter your answers as a positive value rounded to 2 decimal places.) Equivalent Annual Cost Sell new machine Sell old machine

Answer 1

Equated Annual Cost to Sell New Machine Particulars Value of machine if it is sold today Operating costs Overhauling costs Sale of machine Total value of operating costs Tax (21%) Value after tax Discount rate Discounted value Net Present value Year(s) 5 6 7 8 9 10 60500 21400 21400 21400 21400 21400 3070030700 3070030700 307001 19300 -6050 60500 21400 21400 21400 21400407003070030700307003070024650 4494 4494 4494 4494 8547 6447 6447 6447 6447 5176.5 60500 1 6906 16906 16906 16906 32153 24253 24253 24253 24253 19473.5 1 0.900901 0.811622 0.731191 0.658731 0.593451 0.534641 0.481658 0.433926 0.390925 0.352184 60500 15230.63 13721.29 12361.52 11136.51 19081.24 12966.64 11681.66 10524.02 9481.098 6858.264 183542.88 Equated Annual Cost = Net Present Value PV of Annuity Factor 183542.9 6.889232 $ 26642

Equated Annual Cost to Sell Old Machine Year(s) 25700 Particulars Value of machine if it is sold today Overhauling costs Operating Costs Sale of machine Net Operating Costs Tax 21% Value after tax Discount rate Discounted value Net Present value 23500 32800 32800 32800 32800 32800 -6050 49200 3280032800328003280026750 4935 6888 6888 6888 6888 5617.5 44265 25912259122591225912 21132.5 10.900901 0.811622 0.731191 0.658731 0.593451 44265 23344.14 21030.76 18946.63| 17069.04| 12541.11 137196.68 Equated Annual Cost = Net Present Value PV of Annuity Factor 137196.7 4.695897 $ 29216.29