Five years ago, a company in New Jersey installed a diesel-electric unit costing $55,000 at...
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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 $15,000, and property taxes and insurance cost another $3,000 per year. Dependable electric service is now available at an estimated annual cost of $25,000. 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 $40,000, 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 yourecommend? (Find the AW value for the defender and the challenger)
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