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Five years? ago, a company in New Jersey installed a? diesel-electric unit costing $55,000 at a remote site because no dependable electric power was available from a public utility. The company has computed depreciation by the? straight-line method with a useful life of 10 years and a zero salvage value. Annual operation and maintenance expenses are ?$18,000?, and property taxes and insurance cost another $2,500 per year.
Dependable electric service is now available at an estimated annual cost of ?$35,000. The company in New Jersey wishes to know whether it would be more economical to dispose of the? diesel-electric unit? now, when it can be sold for ?$37,000?, or to wait five years when the unit would have to be replaced anyway? (with no? MV). The company has an effective income tax rate of 40?% and tries to limit its capital expenditures to opportunities that will earn at least 18?% per year after income taxes. What would you?recommend?
(Find the AW value for the defender and the challenger)
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