An oil and gas company is trying to determine whether or not it should replace a fixture on one of its offshore oil wells. The fixture would cost $64,000 and would generate annual savings of $25,000 for each of the next 4 years; at the end of 4 years, the fixture woul have negligible salvage value. The fixture will be depreciated using MACRS as 5-year property, the company's after-tax MARR is 6%, and the tax rate is 29%. Compute the FW and use this to determine whether or not the company should replace the fixture. Click here to access the TVM Factor Table calculator. Click here to access the MACRS-GDS Property Classes. Click here to access the MACRS-GDS percentages page. Click here to access the MACRS-GDS percentages for 27.5-year residential rental property. $ 13095.6

An oil and gas company is trying to determine whether or not it should replace a fixture on one of its offshore oil wells. The fixture would cost $64,000 and would generate annual savings of $25,000 for each of the next 4 years; at the end of 4 years, the fixture woul have negligible salvage value. The fixture will be depreciated using MACRS as 5-year property, the company's after-tax MARR is 6%, and the tax rate is 29%. Compute the FW and use this to determine whether or not the company should replace the fixture. Click here to access the TVM Factor Table calculator. Click here to access the MACRS-GDS Property Classes. Click here to access the MACRS-GDS percentages page. Click here to access the MACRS-GDS percentages for 27.5-year residential rental property. $ 13095.6

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 4P

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Although the Chen Company’s milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $110,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $19,000 per year. It would have zero salvage value at the end of its life. The project cost of capital is 10%, and its marginal tax rate is 25%. Should Chen buy the new machine?
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