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Business Economics ENGR.ECONOMIC ANALYSIS W/DASHBOARD

a) To find: Maximum amount to be paid for equipment to eliminate fines by purchasing equipment. Maximum amount which can be paid for the purpose of purchasing the equipment shall be $2,173,850. Maximum amount which can be paid for the equipment shall be the present value of all the costs associated with the equipment over its life. Both fine amount and depreciation are tax deductive and therefore, their impact shall be considered in decision making. MACRS depreciation as mentioned in the problem uses mid-year values for depreciation and therefore, the schedule for depreciation rate shall be as follows: Total cost associated with paying the fines over a period of 6 years shall be Fine Amount × (1 - Tax Rate) × Present Value Annuity Factor Present Value Annuity Factor = 1 − ( 1 + r ) − n r = 1 − ( 1 + .20 ) − 6 .20 = 3.3255 That is, 750 , 000 × ( 1 − 0.28 ) × 3.3255 = 1 , 795 , 775 Let the maximum amount which the company can pay for the equipment be x Therefore, x = 1 , 795 , 775 0.82608 = 2 , 173 , 850 Dollars b) To state: Argument for justification of investment. Strictly speaking in economic terms, the investment shall be justified only if the equipment can be purchased for a value which is lower than the maximum amount of 2,173,850 as calculated in sub-part (a), however, the investment is tied with social responsibility. Purchasing the equipment would add to the reputation of the company and would also contribute in reducing impact of operations on the environment. Moreover, government agencies often reward green firms with better policies and preferential treatments. Such an investment could also contribute in brand building among socially sensitive customers. c) To find: Reduced fee which would justify purchase of equipment for 1 million dollars. It is justified to purchase the equipment for 1,000,000 as long as the annual fines are not below 418,025 Dollars per annual. The maximum amount of which can be paid for the purchase of equipment is the present value of all the fines which would have to be paid over the 6-year life of the equipment. As calculated in sub-part (a) at the current level of fines, present value of costs for payment of these fines is 2,173,850. Therefore, as long as the present value of fines is up to 1 Million dollars it is justified to purchase the equipment. Annual fine value at which the present value turns in to 1 Million dollars can be calculated using the equation: 1,000,000 = Fine Amount × (1 − Tax Rate) × Present Value Annuity Factor 1,000,000 = Fine Amount × ( .72) × 3 .3255 Fine Amount = 1 , 000 , 000 2.3922 = $ 418 , 025 Per Year

a) To find: Maximum amount to be paid for equipment to eliminate fines by purchasing equipment. Maximum amount which can be paid for the purpose of purchasing the equipment shall be $2,173,850. Maximum amount which can be paid for the equipment shall be the present value of all the costs associated with the equipment over its life. Both fine amount and depreciation are tax deductive and therefore, their impact shall be considered in decision making. MACRS depreciation as mentioned in the problem uses mid-year values for depreciation and therefore, the schedule for depreciation rate shall be as follows: Total cost associated with paying the fines over a period of 6 years shall be Fine Amount × (1 - Tax Rate) × Present Value Annuity Factor Present Value Annuity Factor = 1 − ( 1 + r ) − n r = 1 − ( 1 + .20 ) − 6 .20 = 3.3255 That is, 750 , 000 × ( 1 − 0.28 ) × 3.3255 = 1 , 795 , 775 Let the maximum amount which the company can pay for the equipment be x Therefore, x = 1 , 795 , 775 0.82608 = 2 , 173 , 850 Dollars b) To state: Argument for justification of investment. Strictly speaking in economic terms, the investment shall be justified only if the equipment can be purchased for a value which is lower than the maximum amount of 2,173,850 as calculated in sub-part (a), however, the investment is tied with social responsibility. Purchasing the equipment would add to the reputation of the company and would also contribute in reducing impact of operations on the environment. Moreover, government agencies often reward green firms with better policies and preferential treatments. Such an investment could also contribute in brand building among socially sensitive customers. c) To find: Reduced fee which would justify purchase of equipment for 1 million dollars. It is justified to purchase the equipment for 1,000,000 as long as the annual fines are not below 418,025 Dollars per annual. The maximum amount of which can be paid for the purchase of equipment is the present value of all the fines which would have to be paid over the 6-year life of the equipment. As calculated in sub-part (a) at the current level of fines, present value of costs for payment of these fines is 2,173,850. Therefore, as long as the present value of fines is up to 1 Million dollars it is justified to purchase the equipment. Annual fine value at which the present value turns in to 1 Million dollars can be calculated using the equation: 1,000,000 = Fine Amount × (1 − Tax Rate) × Present Value Annuity Factor 1,000,000 = Fine Amount × ( .72) × 3 .3255 Fine Amount = 1 , 000 , 000 2.3922 = $ 418 , 025 Per Year

Solution Summary: The author states that the maximum amount to be paid for equipment to eliminate fines is 2,173,850. Both fine amount and depreciation are tax deductive and therefore, their impact shall be considered in decision making.

ENGR.ECONOMIC ANALYSIS W/DASHBOARD

ENGR.ECONOMIC ANALYSIS W/DASHBOARD

14th Edition

ISBN: 9780190063467

Author: NEWNAN

Publisher: OXF

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ENGR.ECONOMIC ANALYSIS W/DASHBOARD

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