EUAC comparison and an outsider cash flow approach

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Reference no: EM131092000

Clear Water Co. has a down-hole well auger that was purchased 3 years ago for $45,000. It has been depreciated over the three years as a MACRS-GDS 5-year property. It has an estimating remaining life of 7 years. O&M costs are $20,000 per year. Alternative A is to keep the existing auger. It has a current value of $15,000, and it will have a salvage value of $2,000. Alternative B (MACRS-GDS 7-year property class) is to buy a new auger that will cost $65,000 and will have a salvage value of $65,000 (0.755)^t at the end of year t. O&M costs are $3,000 increasing by $1,000 per year. Alternative C is to trade in the existing auger on a "treated auger" that requires vastly less O&M costs at only $2,000 per year. It costs $75,000, and the trade-in allowance for the existing auger is $18,000. The "treated auger" will have an $18,000 salvage value after 7 years, and has a MACRS-GDS 7-year property class. The after-tax MARR is 9%, the tax rate is 35%, and the planning horizon is 7 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 favourable alternative.

Reference no: EM131092000

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