Two alternative machines will produce the same product, but one is capable of hi
ID: 2715926 • Letter: T
Question
Two alternative machines will produce the same product, but one is capable of higher-quality work, which can be expected to return greater revenue. The following are relevant data:
Machine A
Machine B
Capital investment
$16,000
$29,000
Life
12 years
8 years
Terminal BV (and MV)
$5,000
$1,500
Annual receipts
$145,000
$186,000
Annual expenses
$140,000
$166,000
Determine which is the better alternative, assuming repeatability and using SL depreciation, an income tax rate of 40%, and after-tax MARR of 9%.
Please Find Annual Worth, of Machine A and B as well
Machine A
Machine B
Capital investment
$16,000
$29,000
Life
12 years
8 years
Terminal BV (and MV)
$5,000
$1,500
Annual receipts
$145,000
$186,000
Annual expenses
$140,000
$166,000
Explanation / Answer
Answer:
Machine A:
(A/P, 9%, 12) = 0.1397
(A/F, 9%, 12) = 0.0497
Annual depreciation = (16000 – 5000) / 12 = $917
BTCF = Annual Revenues – Annual expenses
Taxable income = BTCF - Annual depreciation
Annual tax amount = 0.40*Taxable income
ATCF = BTCF - Annual tax amount
After tax EUACA = -16,000 (A/P, 9%, 12) + 5000 (A/F, 9%, 12) + 3366.8 = 5850.5
(A/P, 9%, 8) = 0.1807
(A/F, 9%, 8) = 0.0907
Annual depreciation = (29000-1500) /8 = $3438
BTCF = Annual Revenues – Annual expenses
Taxable income = BTCF - Annual depreciation
Annual tax amount = 0.40*Taxable income
ATCF = BTCF - Annual tax amount
After tax EUACB = -29,000 (A/P, 9%, 8) + 1500 (A/F, 9%, 8) + 13375.2 = $18751.6
EUACB > EUACA
Therefore, machine B is a better alternative
Machine A EOY BV Revenues Expenses dk BTCF Taxable Income Tax ATCF EUAC 0 16000 -16000 -16000 -2235.2 1 145000 140000 917 5000 4083 1633.2 3366.8 3366.8 2 145000 140000 917 5000 4083 1633.2 3366.8 3 145000 140000 917 5000 4083 1633.2 3366.8 4 145000 140000 917 5000 4083 1633.2 3366.8 5 145000 140000 917 5000 4083 1633.2 3366.8 6 145000 140000 917 5000 4083 1633.2 3366.8 7 145000 140000 917 5000 4083 1633.2 3366.8 8 145000 140000 917 5000 4083 1633.2 3366.8 9 145000 140000 917 5000 4083 1633.2 3366.8 10 145000 140000 917 5000 4083 1633.2 3366.8 11 145000 140000 917 5000 4083 1633.2 3366.8 12 145000 140000 917 5000 4083 1633.2 3366.8 12 0 5000 5000 248.5 5850.5