Question

The expected annual maintenance expense for a new piece of ewquipment is $10,000. This is alternative A. alternatively, it is pollible to perform the maintenance every fifth year at a cost of $50,000 (alternative B). In either case, maintenance will be performed in the fifth year so that the equipment can be sold for $100,000 at that time. if the MARR is 15% per year (before income taxes), which alternative should be recommended in each of these solutions?

a) before income taxes are consdered
b) after income taxes are considered when t=40%
c) is there a different selection before and after income taxes are considered?

Answer 1

a) before income taxes are considered

we need to calculate the present value of the associated cash flows:

PV alternative A = -$10,000 / 1.15 - $10,000 / 1.15² - $10,000 / 1.15³ - $10,000 / 1.15⁴ + $90,000 / 1.15⁵ = -$8,695.65 - $7,561.44 - $6,575.16 - $5,717.53 + $44,745.91 = $16,196.13

PV alternative B = $50,000 / 1.15⁵ = $24,858.84

Alternative B is better because its PV is higher.

b) after income taxes are considered when t=40%

PV alternative A = -$6,000 / 1.15 - $6,000 / 1.15² - $6,000 / 1.15³ - $6,000 / 1.15⁴ + $54,000 / 1.15⁵ = -$5,217.39 - $4,536.86 - $3,945.10 - $3,430.52 + $26,847.54 = $9,717.67

PV alternative B = $30,000 / 1.15⁵ = $14,915.30

Alternative B is better because its PV is higher.

c) is there a different selection before and after income taxes are considered?

no, both times alternative B was the best alternative