Question

Perform a present worth (PW)-based evaluation of the two alternatives below using a spreadsheet. The after-tax minimum acceptable rate of return (MARR) is 8% per year, Modified Accelerated Cost Recovery System (MACRS) depreciation applies, and Te = 40%. The (GI - OE) estimate is made for the first 3 years; it is zero in year 4 when each asset is sold.

Alternative X Y
First Cost, $ –8,000 –13,000
Salvage Value, Year 4, $ 0 2,000
GI-OE, $ per Year 3,500 5,000
Recovery Period, Years 3 3
The PW for alternative X is determined to be $ .

The PW for alternative Y is determined to be $ .

Alternative Y or X is selected?

Answer 1

The task involves calculating the present worth of two investment alternatives, taking into account the after-tax minimum acceptable rate of return, MACRS depreciation, and tax effects, to identify which alternative provides greater value.

Step-by-step explanation:

The question involves performing a present worth (PW) evaluation for two alternatives using a given after-tax minimum acceptable rate of return (MARR) of 8% per year and accounting for Modified Accelerated Cost Recovery System (MACRS) depreciation and a tax rate of 40%. The cash flows for Alternative X are a first cost of -$8,000, and yearly returns (GI - OE) of $3,500 for the first three years, with no salvage value. For Alternative Y, there is a first cost of -$13,000, yearly returns of $5,000 for the first three years, and a salvage value of $2,000 in year 4. Both alternatives have a recovery period of 3 years. The goal is to calculate the present worth for both alternatives and then decide which one is more cost-effective under these conditions.