Can you please answer Q2 this is all the info in the question. thanks 1) A natur

Question

Can you please answer Q2

this is all the info in the question.

thanks

1) A natural gas distribution company is evaluating the economic desirability of replacing or repairing existing gas mains, it is estimated that 100,000 Mcf of gas being lost per year and that this gas could be sold to corporate customers at $8.00 per Mcf. The cost of replacing the gas mains is estimated to be $4,000,000 at time zero. Replacement of the mains would effectively eliminate all as loss for the next 10 years. The cost of repairing the gas mains is estimated to be $1,600,000 which would reduce annual gas loss to 25,000 Mcf at year one (allocated to the end of the year), with gas loss increasing by a constant gradient of 6,000 Mcf per year in years following year one. Use net present value analysis for a 10-year evaluation life and 15.0% to determine from an economic viewpoint if the gas mains should be replaced, repaired, or left in the present condition

Explanation / Answer

Company should buy new machine now as it will cost less in PV terms...

Please provide feedback.. Thanks in advance... :-)

Alt 1 - Buy used and then purchase new - Year 0 1 2 3 4 Total Purchase cost 120000 350000 Operating cost (operating cost x0.6) 72000 84000 48000 51000 Depreciation (purchase cost/5) 24000 24000 70000 70000 Depreciation tax savings (dep x 40%) -9600 -9600 -28000 -28000    Salvage Value - Book value (at the time of sale= cost -depreciation) 72000 210000 - Salvage value 40000 170000 Loss on sale = 32000 40000 Tax savings on loss -12800 -16000 Net cash flows post tax 120000 62400 411600 20000 7000 (cost + DTS + Operating cost + Tax savings on loss) PV Factor 15% 1 0.869565217 0.756143667 0.657516232 0.571753246 PV of cash flows 120000 54260.86957 311228.7335 13150.32465 4002.272719 502642.2004 Alt 2 - Buy new machine now Year 0 1 2 3 4 Purchase cost 300000 0 0 0 0 Operating cost (operating cost x0.6) 45000 48000 51000 54000 Depreciation (purchase cost/5) 60000 60000 60000 60000 Depreciation tax savings (dep x 40%) -24000 -24000 -24000 -24000    Salvage Value - Book value (at the time of sale= cost -depreciation) 60000 - Salvage value 80000 Profit on sale -20000 Tax on above 8000 Post tax salvage value -12000 Net cash flows post tax 300000 21000 24000 27000 18000 (cost + DTS + Operating cost + Tax savings on loss) PV Factor 15% 1 0.869565217 0.756143667 0.657516232 0.571753246 PV of cash flows 300000 18260.86957 18147.44802 17752.93828 10291.55842 364452.8143

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