Straight-line capital cost allowance is used throughout

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Reference no: EM131050243

A company is evaluating two different irrigation system options. An underground automatic irrigation system will cost $9.2 million to install and $80,000 pre-tax annually to operate. It will not have to be replaced for 20 years. An aboveground system will cost $6.8 million but $190,000 per year to operate. The aboveground equipment has an effective operating life of nine years. The firm leases its land from the city and both systems are considered leasehold improvements; as a result, straight-line capital cost allowance is used throughout, and neither system has any salvage value. Which method should we select if we use a 13 percent discount rate The tax rate is 39 percent. Please show steps.

Reference no: EM131050243

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