Decide which is the more favorable alternative

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Reference no: EM131092008

PhilaU Equipment Co. has a CNC machine that was purchased 5 years ago for $150,000 plus $25,000 of installation costs. It has been depreciated as a MACRS-GDS 5-year property class. It has an estimating remaining life of 8 years. O&M costs were $10,000 for the first year increasing by 5% per year thereafter. Alternative A is to keep the existing CNC. It has a current value of $25,000, and it will have a salvage value of $5,000 at the end of its life. Alternative B (MACRS-GDS 7-year property class) is to buy a new CNC that will cost $200,000 and will have a salvage value of $150,000 (&&QX at the end of year t. O&M costs are a geometric series of $3,000 increasing by 3% per year. Alternative C is to sell the existing CNC on the market for $20,000 and lease a CNC machine. The lease agreement requires a lease payment at the beginning of the year of $40,000 increasing by a gradient series of $1000. O&M costs for the leased equipment are a flat rate of $4,000 per year. The after-tax MARR is 9%, the tax rate is 35%, and the planning horizon is 8 years. Clearly show the ATCF profile for each alternative, and using 3Q, EUAC comparison and an outsider cash flow approach, decide which is the more favorable alternative.

Reference no: EM131092008

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