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Departement de science economique Department of Economics ENGINEERING ECONOMICS ECO 1192B White Assignment #2: Replacement Analysis C

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Departement de science economique

Department of Economics

ENGINEERING ECONOMICS

ECO 1192B

White Assignment #2: Replacement Analysis

C.Theoret Winter 2021

Assignment Instructions

1. Completing an unallocated assignment will result in a zero (0%) score.

2. You will submit your assignment #2 answers on Brightspace on April 1 between 7 and 7:30 pm (Ottawa, Ontario time).

3. Assignment answers submitted late or by other means will be rejected.

4. The sequence of assignment questions in this document will be maintained on April 1 (i.e., no question scrambling)

5. Where appropriate

• Four options will be provided for an assignment question.
• Options will consist of ranges of dollars, percentages etc. depending on the question.

You may wish to consult

Background Paper #12

Defender-Challenger Replacement Analysis

Before- and After-Taxes

B. Problem Statement

You are considering the replacement of currently owned farm equipment.

You have requested three (3) equipment analyses from your financial advisor:

• Section 1: A Before-Tax analysis of the currently owned equipment (Questions 1-5).
• Section 2: An After-Tax analysis of the new equipment (Questions 6-15).
• Section 3: A Capital Tax Factor Analysis of the new equipment (Questions 16-22).

Section 1: Before-Tax Analysis of Challenger

Equipment Details:

1. Before-Tax MARR=10%.

2. Inflation rate=0%.

3. Initial cost, salvage values and annual expenses (O+M) as shown in the table.

Before-Tax Analysis of Challenger: Q1 to Q5
EOY "n"	Market Value	Capital Recovery	O&M	Marginal Cost	AEC If Kept Through Year “n”
0	900,000
1	720,000	AA	80,000
2	576,000		96,000	BB
3	460,000		115,200
4	368,640		138,240
5	249,912		165,888	CC
6	235,930		199,066		DD
7	188,744		238,879
8	150,995		286,654

 

1. The dollar value of cell AA is between

2. The dollar value of cell BB is between

3. The dollar value of cell CC is between

4. The dollar value of cell DD (nearest 100) is

5. The new equipment’s before-tax economic life is

Section 2: After-Tax Analysis of Challenger

Equipment Details:

1. After-Tax MARR=6%.

2. Depreciation Rate=35%

3. Income tax rate=40%.

4. Inflation rate=0%.

5. Initial cost, salvage values and annual expenses (O+M) as shown in the table.

Table Column Headings

A: Before-Tax Market Value of the equipment.

B: Annual Depreciation

C: Book Value

D: Recaptured Depreciation

E: Taxes Payable or Tax Savings on Recaptured Depreciation

F: After-Tax Market Value = Column A - Column E

G: After-Tax Capital Recovery

H: Tax Savings due to Depreciation Charges

I: Before-Tax Operating Expenses

J: After-Tax Operating Expenses

K: Annual Cost for year “n”

L: After-Tax AEW if truck is kept “n” years.

After-Tax Analysis of the Challenger: Q6 to Q15
EOY	A	B	C	D	E	F	G	H	I	J	K	L
0	900,000
1	720,000	157,500	AA						80,000
2	576,000	259,875		BB					96,000
3	460,800	168,919			CC				115,200
4	368,640	109,797				DD			138,240
5	294,912	71,368					EE		165,888
6	235,930	46,389						FF	199,066	GG
7	188,744	30,153							238,879		HH
8	150,995	19,599							286,654			II

 

6. The dollar value of cell AA is between

7. The dollar value of cell BB is between

8. The dollar value of cell CC is between

9. The dollar value of cell DD is between

10. The dollar value of cell EE is between

11. The dollar value of tax savings (a positive value) in cell FF is between

12. The dollar value of cell GG is between

13. The dollar value of cell HH is between

14. The dollar value of cell Il is between

15. The after-tax economic life of the challenger is

Section 3: Capital Tax Factor Analysis of Challenger (Q16 to

Q22)

Equipment Details:

1. After-Tax MARR=6%.

2. Depreciation Rate=35%

3. Income tax rate=40%.

4. Inflation rate=0%.

5. Salvage values and annual expenses (O+M) as shown in the table.

CTF (After-Tax) Analysis of Challenger: Q16-Q22
EOY	Before-Tax Market Value	Before-Tax Operating Expenses
0	900,000
1	720,000	80,000
2	576,000	96,000
3	460,800	115,200
4	368,640	138,240
5	294,912	165,888
6	235,930	199,066
7	188,744	238,879
8	150,995	286,654

 

16. The capital tax factor (CTF) with the half-year rule is between

17. The capital salvage factor (CSF) (4 decimals; no rounding) is

18. The equipment’s first year service cost is

19. The equipment’s annual equivalent cost for a two-year service life is

20. The equipment’s annual equivalent cost for a four-year service life is

21. The equipment’s annual equivalent cost for a seven-year service life is

22. How many (full) years should the equipment be in service to minimize after-tax costs?