A manufacturing company has some existing semiautomatic production equipment that it is considering replacing. This equipment has a presentMV of $57,000 and a BV of $27,000. It has five more years of depreciation available under MACRS (ADS) of $6,000 per year for four years and $3,000 in year five. (The original recovery period was nine years.) The estimatedMV of the equipment five years from now is $18,500. The total annual operating and maintenance expenses are averaging $27,000 per year. New automated replacement equipment would then be leased. Estimated annual operating expenses for the new equipment are $12,200 per year. The annual leasing costs would be $24,300. The MARR (after taxes) is 9% per year, t = 40%, 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.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
A manufacturing company has some existing semiautomatic production equipment that it is considering replacing. This equipment has a present
MV of $57,000 and a BV of $27,000. It has five more years of depreciation available under MACRS (ADS) of $6,000 per year for four years and $3,000 in year five. (The original recovery period was nine years.) The estimated
MV of the equipment five years from now is $18,500. The total annual operating and maintenance expenses are averaging $27,000 per year. New automated replacement equipment would then be leased. Estimated annual operating expenses for the new equipment are $12,200 per year. The annual leasing costs would be $24,300. The MARR (after taxes) is 9% per year, t = 40%, 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
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