Compare the after-tax annual costs

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Machine A has been completely overhauled for $9000 and is expected to last another 12 years. The $9000 was treated as an expense for tax purposes last year. Machine A can be sold now for $30,000 net after selling expenses, but will have no salvage value 12 years hence. It was bought new 9 years ago for $54,000 and has been depreciated since then by straight-line depreciation using a 12-year depreciable life. Becauseless output is now required, MachineA can be replaced with a smaller machine: Machine B costs $42,000, has an anticipated life of 12 years, and would reduce operating costs $2500 per year. It would be depreciated by straight-line depreciation with a 12-year depreciable life and no salvage value. The income tax rate is 40%. Compare the after-tax annual costs and decide whether Machine A should be retained or replaced by Machine B. Use a 10% after-tax rate of return.

Reference no: EM131810509

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