Reference no: EM133039712

Question - You work in a pharmaceutical company that specializes in vaccine production. The demand of vaccine is high, so your company is working on adding a new production line. There are two options:

Line A costs $460,000. It has a four-year life, $52,250 annual operating costs, and a salvage value of $86,000 after four years.

Line B costs $886,000. It has a six-year life, $31,400 annual operating costs, and a salvage value of $78,000 after six years.

The average hourly cost of operating each production line also differs: $28 for A and $24 for B. You expect either production line to operate about 140 hours a week for 50 weeks a year.

Both systems are to be depreciated using the 6 years depreciation schedule of the Modified Accelerated Cost Recovery System (MACRS).

The MACRS schedule is as follows:

Year: Depreciation

1: 0.2000

2: 0.3200

3: 0.1920

4: 0.1152

5: 0.1152

6: 0.0576

The company's tax rate is 30% and its required rate of return is 16%.

a) What is the equivalent annual cost of each production line?

b) If both production lines will have to be replaced when they wear out, which line should the company consider adding?