Assumption of classical straight line depreciation

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Reference no: EM131321124

Nuclear safety devices installed several years ago have been depreciated from a ?rst cost of $200,000 to zero using MACRS. The devices can be sold on the used equipment market for an estimated $15,000. Or they can be retained in service for 5 more years with a $9000 upgrade now and an AOC of $6000 per year. The upgrade investment will be depreciated over 3 years with no salvage value. The challenger is a replacement with newer technology at a ?rst cost of $40,000, n = 5 years, and S = 0. The new units will have operating expenses of $7000 per year.

DETERMINE:

(a) Use a 5-year study period, an effective tax rate of 40%, an after-tax MARR of 12% per year, and an assumption of classical straight line depreciation (no half-year convention) to per-form an after-tax replacement study.

(b) If the challenger is known to be salable after 5 years for an amount between $2000 and $4000, will the challenger AW value become more or less costly? Why?

Reference no: EM131321124

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