Question

Problem 17.049: Calculate the after-tax AW of two alternatives A European candy manufacturing plant manager must select a new irradiation system to ensure the safety of specific ingredients, while being economical. The two alternatives available have the following estimates: System First Cost, $ CFBT, $ per year Life, Years -120,000 60,000 -85,000 20,000 The company is in the 35% tax bracket and assumes classical straight line depreciation for alternative comparisons performed at an after-tax minimum acceptable rate of return (MARR) of 6% per year. A salvage value of zero is used when depreciation is calculated; however, system B can be sold after 5 years for an estimated 20% of its first cost. System A has no anticipated salvage value. Determine which is more economical using an annual worth (AW) analysis worked by hand. The annual worth analysis for system A is determined to be $ . The annual worth analysis for system Bis determined to be $O System A is selected.

Answer 1

For system A

SL dep per year = (P-S)/N = (120000 - 0) / 3 = 40000

Taxable income per year = 60000 - 40000 = 20000

Tax per year = 0.35 * 20000 = 7000

ATCF per year = BTCF - Tax = 60000 - 7000 = 53000

AW of A = -120000 * (A/P,6%,3) + 53000 = -120000 *0.374110 + 53000 = 8106.80

For system B

Salvage value = 0.2 * 85000 = 17000

SL dep per year = (P-S)/N = (85000 - 17000) / 5 = 13600

Taxable income per year = 20000 - 13600 = 6400

Tax per year = 0.35 * 6400 = 2240

ATCF per year = 20000 - 2240 = 17760

AW of B = -85000 * (A/P,6%,5) + 17760 + 17000 * (A/F,6%,5)

= -85000 *0.237396 + 17760 + 17000 *0.177396

= 597.07

As AW of A is more, it should be selected