Please I need 100% correct answer by hands when you do the table no Excel or any
ID: 2789671 • Letter: P
Question
Please I need 100% correct answer by hands when you do the table no Excel or any prgrams .
A machine with a useful life of 3 vears is purchased for S100,000. Itis known that the market value of the machine decreases by 10% each year. The book value can be calculated by assuming straight-line depreciation over a 4zear depreciable life to a salvage value of $20,000 The machine geneatesazrmss income of $50,000 annually. The operating and maintenance costs are $30,000 in year 1, increasing by $5,000 each year. Determine the after-tax marginal costs if the tax rate is 40% and 10%. If the minimum EUAC of a challenger is $56,000 when should the machine be replaced? (40 marks) ..Explanation / Answer
Estimated annual after tax Operating and maintenance expenses:
Year 1= $30,000(1-0.4)= $18,000
Year 2= $35,000(1-0.4)= $21,000
Year 3= $40,000(1-0.4)=$24,000
PVFA for three years:
1/(i)n
Year 1= 1/1.1= 0.909
year 2= 1/(1.1)2=0.826
Year 3= 1/(1.1)3= 0.751
Marginal cost of 1st three years of operating the machine:
After tax operating expense x PVF
Year 1= 18,000 x 0.909= 16,362
Year 2= 21,000 x 0.826= 17,346
Year 3= 24,000 x 0.751= 18,024
Total after tax marginal cost over the lifetime of machine comes to $52,410 at the end of three years.
If minimum EUAC of a challenger $56,000 and if the defender product is identical to the challenger, its minimum EUAC and optimum lifetime will be same as of the challenger. Since the after tax MC of the machine is less than the challenger at the end of 3 year period, the machine should be replaced after the end of year 4.