Dell is considering replacing one of its material handling systems. The old system was purchased 7 years agofor $130,000 and was depreciated as MACRS-GDS 5-year property since the system is used in the manufactureof electronic components. It has an annual O&M cost of $48,000, a remaining operational life of 8 years, and anestimated salvage value of $6,000 at that time. A new system can be purchased for $175,000. It will be worth$50,000 in 8 years, and it will have annual O&M costs of only $17,000 per year due to new technology. If thenew system is purchased, the old system will be traded in for $55,000, even though the old system can be sold536 CHAPTER 11 / REPLACEMENT ANALYSISfor only $45,000 on the open market. Leasing a new system will cost $31,000 per year, payable at the beginningof the year, plus operating costs of $15,000 per year payable at year-end. If the new system is leased, theexisting material handling system will be sold for its market value of $45,000.Use an 8-year planning horizon,an annual worth analysis, a tax rate of 40 percent, and an after-tax MARR of 9 percent to decide which materialhandling system to recommend: keep existing, trade in existing and purchase new, or sell existing and lease.a. Use the cash flow approach (insider’s viewpoint approach). (11.2.2)b. Use the cash flow approach (insider’s viewpoint approach), except note that a Section 1031 like-kind propertyexchange is to be used. The equipment replaced will continue to be replaced by like-kind investments in theUnited States indefinitely. Recall that a Section 1031 like-kind property exchange does not apply to leases.(11.4
Dell is considering replacing one of its material handling systems. The old system was purchased 7 years ago
for $130,000 and was depreciated as MACRS-GDS 5-year property since the system is used in the manufacture
of electronic components. It has an annual O&M cost of $48,000, a remaining operational life of 8 years, and an
estimated salvage value of $6,000 at that time. A new system can be purchased for $175,000. It will be worth
$50,000 in 8 years, and it will have annual O&M costs of only $17,000 per year due to new technology. If the
new system is purchased, the old system will be traded in for $55,000, even though the old system can be sold
536 CHAPTER 11 / REPLACEMENT ANALYSIS
for only $45,000 on the open market. Leasing a new system will cost $31,000 per year, payable at the beginning
of the year, plus operating costs of $15,000 per year payable at year-end. If the new system is leased, the
existing material handling system will be sold for its market value of $45,000.Use an 8-year planning horizon,
an annual worth analysis, a tax rate of 40 percent, and an after-tax MARR of 9 percent to decide which material
handling system to recommend: keep existing, trade in existing and purchase new, or sell existing and lease.
a. Use the cash flow approach (insider’s viewpoint approach). (11.2.2)
b. Use the cash flow approach (insider’s viewpoint approach), except note that a Section 1031 like-kind property
exchange is to be used. The equipment replaced will continue to be replaced by like-kind investments in the
United States indefinitely. Recall that a Section 1031 like-kind property exchange does not apply to leases.
(11.4
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