A currently owned shredder originally costing $800,000 was purchased 5 years ago
ID: 2460981 • Letter: A
Question
A currently owned shredder originally costing $800,000 was purchased 5 years ago (MACR-GDS 7 year property class) for use in a refuse-powered electrical generating plant. It has a present realizable value of $210,000 and is expected to have a market value of $150,000 after 4 more years. Operating and maintenance costs are $100,000 per year. An equivalent shredder can be leased for $250 per day plus $80 per hour of actual use as determined by an hour meter, with both expenses paid at year-end. Actual use is expected to be 1,500 hours and 250 days per year. Use the cash flow approach (insider's approach), a 4 year-planning horizon, a tax rate of 40%, and a MARR of 9% to perform after-tax analysis to determine the break-even point (number of days and hours) in which the preferred alternative is to lease.Explanation / Answer
Recovery Year Machinery cost 7-Year Depreciation for the year Accumulated Dep book value 1 800,000 14.29 114,320 114,320 685,680 2 800,000 24.49 195,920 310,240 489,760 3 800,000 17.49 139,920 450,160 349,840 4 800,000 12.49 99,920 550,080 249,920 5 800,000 8.93 71,440 621,520 178,480 6 800,000 8.92 71,360 692,880 107,120 7 800,000 8.93 71,440 764,320 35,680 8 800,000 4.46 35,680 800,000 - Cost to be incurred in leasing of equipment $ No of Hours used in a year Total in $ Per hour rate 80 1500 120,000 per day rate 250 250 62,500 Total Lease exp 182,500 Case 1 :- using of Existing Machine Year 1 Year 2 Year 3 Year 4 Total Cash outlflow Depreciation 71,360 71,440 35,680 Maint. Cost 100000 100000 100000 100000 Total 171,360 171,440 135,680 100,000 Tax Savings @ 40% 68,544 68,576 54,272 40,000 Net Cash outflow 102,816 102,864 81,408 60,000 Cash Inflow 150,000 Final Net cash outflow 102,816 102,864 81,408 -90,000 Discount rate @ 9% 0.917 0.842 0.772 0.708 PV of Cash outflow 94,327 86,579 62,862 -63,758 180,009 Case 2 :- using of Leased Machine Year 1 Year 2 Year 3 Year 4 Total Cash outlflow Lease Exp 182,500 182,500 182,500 182,500 Tax Savings @ 40% 73,000 73,000 73,000 73,000 Net Cash outflow 109,500 109,500 109,500 109,500 Cash Inflow 210000 - Final Net cash outflow -100,500 109,500 109,500 109,500 Discount rate @ 9% 0.917 0.842 0.772 0.708 PV of Cash outflow -92,202 92,164 84,554 77,573 162,089 Remark PV of Cash outlow is higher in using of existing machine. Therfore it is better to use the machine on lease and sell the existing machine.