A manufacturing company has some existing semiautomatic production equipment that it is considering replacing. This equipment has a present MV of $55 comma 000 and a BV of $31 comma 500. It has five more years of depreciation available under MACRS (ADS) of $7 comma 000 per year for four years and $3 comma 500 in year five. (The original recovery period was nine years.) The estimated MV of the equipment five years from now is $18 comma 500. The total annual operating and maintenance expenses are averaging $26 comma 000 per year. New automated replacement equipment would then be leased. Estimated annual operating expenses for the new equipment are $12 comma 500 per year. The annual leasing costs would be $23 comma 900. The MARR (after taxes) is 8% per year, tequals40%, and the analysis period is five years. (Remember: The owner claims depreciation, and the leasing cost is an operating expense.) Based on an after-tax analysis, should the new equipment be leased? Base your answer on the IRR of the incremental cash flow.

[tex]\left[\begin{array}{cccc}&New&Old&Differential\\$leasing cost&0&-23,000&23,000\\$operarting cost&-26,000&-12,500&-13,500\\$operating income&-26,000&-35,500&9,500\\$tax shield&4,200&0&4,200\\$Result&-21,800&-35,500&13,700\\\end{array}\right][/tex]

each year the new equipment generates a 13,700 adidtional cash outflow

We should check if the cost saving per year at 8% will have a present value lower than the proceed from the sale:

C 13,700.00

time 5

rate 0.08

[tex]13700 \times \frac{1-(1+0.08)^{-5} }{0.08} = PV\\[/tex]

PV $59,076.1377

As the differential cost exceeds the amount of proceed we would get if the old equipment is sold we already conclude we should keep it