Reference no: EM131095956
Clear Water Company has a down-hole well auger that was purchased 3 years ago for $30,000. It has been depreciated over the 3 years as MACRS-GDS 5-year property. It has an estimated remaining life of 7 years. O&M costs are $13,000 per year. Alternative A is to keep the existing auger. It has a current market value of $12,000, and it will have a $0 salvage value after 7 more years. Alternative B is to buy a new auger that will cost $54,000 and will have a $14,000 salvage value after 7 years. O&M costs are $6,000 for the new auger. Clear water can trade in the existing auger on the new one for $15,000. Alternative C is to trade in the existing auger on a “treated auger” that requires vastly less O&M cost at only $3,000 per year. It costs $68,000, and the trade-in allowance for the existing auger is $17,000. The “treated auger” will have an $18,000 salvage value after 7 years. Alternative D is to sell the existing auger for its market value of $12,000 and to contract with a current competitor to use their equipment and services to perform the drilling that would normally be done with the existing auger. The competitor requires a beginning-of-year retainer payment of $10,000. End-of-year O&M cost would be $6,000. The after-tax MARR is 9 percent, the tax rate is 40 percent, and the planning horizon is 7 years.
Clearly show the after-tax cash flow profile for each alternative using a cash flow approach (insider’s viewpoint approach). (11.2.2)
Using an EUAC comparison and a cash flow approach (insider’s viewpoint approach), decide which is the more favorable alternative. (11.2.2)
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: Clear Water Company has a down-hole well auger that was purchased 3 years ago for $30,000. It has been depreciated over the 3 years as MACRS-GDS 5-year property. It has an estimated remaining life of 7 years. O&M costs are $13,000 per year. Using an ..
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