Problems 395inflation, how large an investment in the new equip-
ment can be eQonomically justified by savings ob-
tained by eliminating the present equipment and labor
costs? The existing equipment has zero salvage value.
12-45 A contractor has to choose one of the following alter-
natives in performing earth-moving contracts:
(a) Purchase a heavy-duty truck for $13,000. Salvage
value is expected to be $3000 at the end of the
vehicle's 7-year depreciable life. Maintenance is
$1100 per year. Daily operating expenses are $35.
(b) Hire a similar unit for $83 per day.
Based on a 10% after-tax rate of return, how many
days per year must the truck be used to justify its
purchase? Base your calculations on straight-line
depreciation and a 50% income tax rate.
(Answer: 91 Y2days)
1" ")The Able Corporationis considering the installation
of a small electronic testing device for use in con-
junction with a government contract the firm has just
won. The testing device will cost $20,000, and have
an estimated salvage value of $5000 in 5 years when
the government contract is finished. The firm will de-
preciate the instrument by the sum-of-years' -digits
method, using 5 years as the useful life and a $5000
salvage value. Assume that Able pays 50% federal
and state corporate income taxes and uses 8%after-
taxin economic analysis. What minimum equal an-
nual benefit must Able obtainbefore taxesin each of
the 5 years to justify purchasing the electronic testing
device? (Answer: $5150)
12-47 A house and lot are for sale for $155,000. It is es-
timated that $45,000 is the value of the land and
$110,000 is the value of the house. If purchased,
the house can be rented to provide a net income of
$12,000 per year after taking all expenses, except de-
preciation, into account. The house would be depre-
ciated by straight line depreciation using a 27.5-year
depreciable life and zero salvage value.
Mary Silva. the prospective purchaser, wants a
10% after-tax rate of return on her investment after
considering both annual income taxes and a capital
gain when she sells the house and lot. At what price
would she have to sell the house at the end of 10 years
to achieve her objective? You may assume that Mary
has an incremental income tax rate of 27% in each of
the 10 years.12-48 A corporation is considering buying a medium-sized
computer that will eliminate a task that must be per-
formed three shifts per day, 7 days per week, except
for one 8-hour shift per week when the operation
is shut down for maintenance. At present four peo-
ple are needed to perform the day and night tasks.
Thus the computer will replace four employees. Each
employee costs the company $32,000 per year
($24,000 in direct wages plus $8000 per year in other
company employee costs). It will cost $18,000 pe~
year to maintain and operate the computer. The com-
puter will be depreciated by sum-of-years' -digits de-
preciation using a 6-year depreciable life, at which
time it will be assumed to have zero salvage value.
The corporation has a combined federal and state
incremental tax rate of 50%. If the firm wants a 15%
rate of return, after considering both state and federal
income taxes, how much can it afford to pay for the
computer?
12-49 A sales engineer has the following alternatives .to
consider in touring his sales territory.
(a)Buy a new car for $14,500. Salvage value is ex-
pected to be about $5000 after 3 years. Main-
tenance and insurance cost is $1000 in the first
year and increases at the rate of $500/year in
subsequent years. Daily operating expenses are
$50/day.
(b)Rent a similar car for $80/day.
Based on a 12% after-tax rate of return, how many
days per year must he use the car to justify its pur-
chase? You may assume that this sales engineer is
in the 30% incremental tax bracket. Use MACRS
depreciation.
12-50 A large profitable company, in the 40% federal/state
tax bracket, is considering the purchase of a new piece
of equipment. The new equipment will yield benefits
of $10,000 in Year 1, $15,000 in Year 2, $20,000 in.
Year 3, and $20,000 in Year4. The equipment is to be
depreciated using 5-year MACRS depreciation start-
ing in the year of purchase (Year 0). It is expected that
the equipment will be sold at the end of fourth year
at 20% of its purchase price. What is the maximum
equipment purchase price the company can pay if iis
after-tax MARR is 1O%?
12-51 A prosperous businessman is considering two alter-
native investments in bonds. In both cases the first
interest payment would be received at the end of
the first year. If his personal taxable income is fixed
at $40,000 and he is single, which investment pro-
duces the greater after-tax rate of return? Compute the
after-tax rate of return for each bond to within y 4 of
1 percent.81'H_
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