2. A special-purpose machine is being installed at a first cost of $20,000. The following table shows the expected annual operating costs, maintenance costs and salvage values for each year of service. If interest is 10% annually, what is the economic service life for this machine? Year of Service Operation Cost for Maintenance Cost Salvage Value at Year for Year End of Year $2,000 $3,000 $4,000 $5,000 $200 $300 $400 $500 $10,000 $9,000 $8,000 $7,000 1 2 3 4

2. A special-purpose machine is being installed at a first cost of $20,000. The following table shows the expected annual operating costs, maintenance costs and salvage values for each year of service. If interest is 10% annually, what is the economic service life for this machine? Year of Service Operation Cost for Maintenance Cost Salvage Value at Year for Year End of Year $2,000 $3,000 $4,000 $5,000 $200 $300 $400 $500 $10,000 $9,000 $8,000 $7,000 1 2 3 4

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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onsider the following financial informationabout a retooling project at a computer manufacturing company:• The project costs $2.5 million and has a five-yearservice life.• The retooling project can be classified as sevenyear property under the MACRS rule.• At the end of the fifth year, any assets held for theproject will be sold. The expected salvage valuewill be about 10% of the initial project cost.• The firm will finance 40% of the project moneyfrom an outside financial institution at an interestrate of 10%. The firm is required to repay the loanwith five equal annual payments.• The firm’s incremental (marginal) tax rate on theinvestment is 35%.• The firm’s MARR is 18%.With the preceding financial information,(a) Determine the after-tax cash flows.(b) Compute the annual equivalent worth for thisproject.
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