Allen International, Inc., manufactures chemicals. It needs to acquire a new piece of production equipment to work on production for a large order that Allen has received. The order is for a period of three years, and atthe end of that time the machine would be sold. Allen has received two supplier quotations, both of which will provide the required service. Quotation I has a first cost of $180,000 and an estimated salvage value of$50,000 at the end of three years. Its cost for operation and maintenance is estimated at $28,000 per year. Quotation II has a first cost of $200,000 and an estimated salvage value of $60,000 at the end of three years. Its cost for operation and maintenance is estimated at $17,000 per year. The company pays income tax at a rate of 40% on ordinary income and 28% on depreciation recovery. The machine will be depreciated using MACRS-GDS (asset class 28.0). Allen uses an after-tax MARR of 12% for economic analysis, and it plans to accept whichever of these two quotations costs less. To perform an after-tax analysis to determine which of these machines should be acquired, you must a. state the study period you are using. b. show all numbers necessary to support your conclusions. c. state what the company should do.
Allen International, Inc., manufactures chemicals. It needs to acquire a new piece of production equipment to work on production for a large order that Allen has received. The order is for a period of three years, and at
the end of that time the machine would be sold. Allen has received two supplier quotations, both of which will provide the required service. Quotation I has a first cost of $180,000 and an estimated salvage value of
$50,000 at the end of three years. Its cost for operation and maintenance is estimated at $28,000 per year. Quotation II has a first cost of $200,000 and an estimated salvage value of $60,000 at the end of three years. Its cost for operation and maintenance is estimated at $17,000 per year. The company pays income tax at a rate of 40% on ordinary income and 28% on depreciation recovery. The machine will be depreciated using MACRS-GDS (asset class 28.0). Allen uses an after-tax MARR of 12% for economic analysis, and it plans to accept whichever of these two quotations costs less. To perform an after-tax analysis to determine which of these machines should be acquired, you must a. state the study period you are using. b. show all numbers necessary to support your conclusions. c. state what the company should do.
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