Explanation The recovery rate under General Depreciation System for seven years is given in the below table: Year 7-year 1 0.1429 2 0.2449 3 0.1749 4 0.1249 5 0.0893 6 0.0892 7 0.0893 8 0.0446 Depreciation (D) can be calculated by using the following formula. Purchase price includes installation cost. D i = Purchase price × RR i (1) Substitute the respective values in Equation (1) to calculate the depreciation in year 1. D i = 420 ,000 × 0 .1429 = 162 , 906 First year depreciation is $162,906. Before tax cash flow is denoted by BTCF which is the net annual revenue. Taxable income (TI) can be calculated by using the following formula. TI i = BTCF i − Depreciation i (2) Substitute the respective values in Equation (2) to calculate the taxable income. TI i = − 115 , 500 − 162 , 906 = − 278 , 406 Taxable income in the year 1 is -$278,406. Tax payment (TP) can be calculated as follows. TP i = TI i × ( − Tax rate ) (3) Substitute the respective values in Equation (3) to calculate the tax payment. TP 1 = − 278 , 406 × ( − 0 .4 ) = 111 , 362.4 Taxable income in the year 1 is 69,602. After tax cash flow (ATCF) can be calculated as follows. ATCF i = BTCF i + TP i (4) Substitute the respective values in Equation (4) to calculate the ATCF for the first year. ATCF 1 = − 115 , 500 + 111 , 362.4 = − 4 , 137.6 ATCF in the year 1 is -$4,137.16. Table 1 shows the value of ATCF for New bag house that obtained by using Equations (1), (2), (3) and (4). The last year BTCF is included the selling price value or salvage value. Table 1 Year BTCF Depreciation TI Tax amount ATCF 0 –1,140,000 -1,140,000 1 –115,500 162,906 –278,406 111,362 -4,138 2 –115,500 279,186 –394,686 157,874 42,374 3 –115,500 199,386 –314,886 125,954 10,454 4 –115,500 142,386 –257,886 103,154 -12,346 5 –115,500 101,802 –217,302 86,921 -28,579 6 –115,500 101,688 –217,188 86,875 -28,625 7 –115,500 101,802 –217,302 86,921 -28,579 8 –115,500 50,844 –166,344 66,538 -48,962 9 –115,500 0 –115,500 46,200 -69,300 10 –115,500 0 –115,500 46,200 -69,300 Time period is denoted by n and the interest is denoted by i. Present worth (PW) for new bag house is calculated by using the following formula. PW = ( ATCF 0 + ATCF 1 ( 1 + i ) 1 + ATCF 2 ( 1 + i ) 2 + ... + ATCF n ( 1 + i ) n ) = ( − 1,140,000 + ( − 4 , 1327.6 ( 1 + 0.09 ) 1 ) + ( 42 , 374.4 ( 1 + 0.09 ) 2 ) + ( 10 , 454.4 ( 1 + 0.09 ) 3 ) + ( − 12 , 345.6 ( 1 + 0.09 ) 4 ) + ( − 28 , 579

16th Edition

ISBN: 9780133819014

Author: Koelling

Publisher: YUZU

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Chapter 7, Problem 37P

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Select the alternative based on the ATCF.

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Chapter 7, Problem 36P

Chapter 7, Problem 38P

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1. Riaz has a limited income and consumes only Apple and Bread. His current consumption choice is 3 apples and 5 bread. The price of apple is $3 each, and the price of bread is $2.5 each. The last apple added 5 units to Sadid's utility, while the last bread added 7 units. Is Riaz making the utility-maximizing choice? Why or why not? Do you suggest any adjustment in Riaz's consumption bundle? Why or why not? Give reasons in support of your answer. State the condition for a consumer's utility maximizing choice and illustrate graphically. 2. Consider the following table of long-run total costs for three different firms: Quantity Total Cost ($) Firm A Firm B Firm C 1 60 11 21 2 70 24 34 3 80 39 49 4 90 56 66 5 100 75 85 6 110 96 106 7 120 119 129 Does each of these firms experience economies of scale or diseconomies of scale? Explain your answer with necessary calculations.

Riaz has a limited income and consumes only Apple and Bread. His current consumption choice is 3 apples and 5 bread. The price of apple is $3 each, and the price of bread is $2.5 each. The last apple added 5 units to Sadid's utility, while the last bread added 7 units. Is Riaz making the utility-maximizing choice? Why or why not? Do you suggest any adjustment in Riaz's consumption bundle? Why or why not? Give reasons in support of your answer.State the condition for a consumer's utility maximizing choice and illustrate graphically.

Chapter 7 Solutions

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