A highly specialized piece of equipment has a first cost of $50,000. If this equipment is purchased, it will be used to produce income (through rental) of $20,000 per year for only four years. At the end of year four, the equipment will be sold for a negligible amount. Estimated annual expenses for upkeep are $3,000 during each of the four years. The MACRS (GDS) recovery period for the equipment is seven years, and the firm’s effective income tax rate is 40%. Solve, (a) If the after-tax MARR is 7% per year, should the equipment be purchased? (b) Rework the problem, assuming that the equipment is placed on standby status such that depreciation is taken over the full MACRS recovery period.

A highly specialized piece of equipment has a first cost of $50,000. If this equipment is purchased, it will be used to produce income (through rental) of $20,000 per year for only four years. At the end of year four, the equipment will be sold for a negligible amount. Estimated annual expenses for upkeep are $3,000 during each of the four years. The MACRS (GDS) recovery period for the equipment is seven years, and the firm’s effective income tax rate is 40%. Solve, (a) If the after-tax MARR is 7% per year, should the equipment be purchased? (b) Rework the problem, assuming that the equipment is placed on standby status such that depreciation is taken over the full MACRS recovery period.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 18P

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