A granary has two options for a conveyor used in the manufacture of grain for tr
ID: 1211032 • Letter: A
Question
A granary has two options for a conveyor used in the manufacture of grain for transporting, filling, or emptying. One conveyor can be purchased and installed for $80,000 with $3,000 salvage value after 16 years. The other can be purchased and installed for $90,000 with $2,000 salvage value after 16 years. Operation and maintenance for each is expected to be $21,000 and $15,000 per year, respectively. The granary uses MACRS-GDS depreciation, has a marginal tax rate of 40%, and has a MARR of 9% after taxes.
Determine which alternative is less costly, based upon comparison of after-tax annual worth.
Show the AW values used to make your decision:
Conveyor 1: $
Conveyor 2: $
Explanation / Answer
Answer:
Conveyor 1’s Annual Worth:
Life time: 16years
MARR: 9%
Initial cost: $80,000(A/P, 9%, 16) = $9600
Salvage Value: $3,000(A/F 9%, 16) = $90
O & M costs: $21,000(P/A, 9%, 16) = $174,510
Tax rate: 40% 0.40(80,000) = $32,000
Now, AW of Conveyor 1 is: -9,600 – 174,510 -22,300 + 90
= - 206,320
Conveyor 2’s Annual Worth:
Life time: 16years
MARR: 9%
Initial cost: $90,000(A/P, 9%, 16) = $10,800
Salvage Value: $2,000(A/F 9%, 16) = $60
O & M costs: $15,000(P/A, 9%, 16) = $124,650
Tax rate: 40% 0.40(90,000) = $36,000
Now, AW of Conveyor 2 is: -10,8 00 – $36,000-22,300 + 60
= -69040
The Conveyor 2’s Annual Worth is-69040 is less costly alternative.