A granary has two options for a conveyor used in the manufacture of grain for tr
ID: 2802693 • 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 $85,000 with $4,000 salvage value after 16 years. The other can be purchased and installed for $125,000 with $5,000 salvage value after 16 years. Operation and maintenance for each is expected to be 21,500 and $13,000 per year, respectively. The granary uses MACRS-GDS depreciation, has a marginal tax rate of 40%, and has a MARR of 9% after taxes Determine which alternative is less costly, based upon comparison of after-tax annual worth. Show the AW values used to make your decision: Conveyor 1:$ Conveyor 2: Carry all interim calculations to 5 decimal places and then round your final answer to the nearest dollar. The tolerance is ±3%Explanation / Answer
Option 1- Conveyor-1 Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Initial investment 85000 Operation and maintenance 21500 21500 21500 21500 21500 21500 21500 21500 21500 21500 21500 21500 21500 21500 21500 21500 Salvage value 4000 Depreciation 5062.5 5062.5 5062.5 5062.5 5062.5 5062.5 5062.5 5062.5 5062.5 5062.5 5062.5 5062.5 5062.5 5062.5 5062.5 5062.5 Cash flow before tax -26562.5 -26562.5 -26562.5 -26562.5 -26562.5 -26562.5 -26562.5 -26562.5 -26562.5 -26562.5 -26562.5 -26562.5 -26562.5 -26562.5 -26562.5 -22562.5 Tax -10625 -10625 -10625 -10625 -10625 -10625 -10625 -10625 -10625 -10625 -10625 -10625 -10625 -10625 -10625 -9025 Net operating cash flows -10875 -10875 -10875 -10875 -10875 -10875 -10875 -10875 -10875 -10875 -10875 -10875 -10875 -10875 -10875 -8475 MARR 9% Annual worth -1,74,794.58 Using NPV formula and rate as 9% Option 2- Conveyor-2 Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Initial investment 125000 Operation and maintenance 13000 13000 13000 13000 13000 13000 13000 13000 13000 13000 13000 13000 13000 13000 13000 13000 Salvage value 5000 Depreciation 7500 7500 7500 7500 7500 7500 7500 7500 7500 7500 7500 7500 7500 7500 7500 7500 Cash flow before tax -20500 -20500 -20500 -20500 -20500 -20500 -20500 -20500 -20500 -20500 -20500 -20500 -20500 -20500 -20500 -15500 Tax -8200 -8200 -8200 -8200 -8200 -8200 -8200 -8200 -8200 -8200 -8200 -8200 -8200 -8200 -8200 -6200 Net operating cash flows -4800 -4800 -4800 -4800 -4800 -4800 -4800 -4800 -4800 -4800 -4800 -4800 -4800 -4800 -4800 -1800 MARR 9% Annual worth -1,64,144.67 Using NPV formula and rate as 9% So as per annual worth Option 2 is less costly as compared to option 1