You were asked by the Manager of Engineering to propose a solution for a current production...

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Finance

You were asked by the Manager of Engineering to propose asolution for a current production line problem. After analyzing theissues you came up with two solutions, both of which will solve theproblem for the next five years. Solution A would initially cost$90,000, have annual O&M costs of $22,000 and will generateannual savings of $48,000, while solution B will need an initial$62,000, $17,000 for annual O&M costs, and will generate annualsavings of $36,000. Both will have salvage values, $15,000 forsolution A, and $10,000 for B. Your company’s marginal income taxrate is 40%, and its MARR is 10%. The proposed equipment for bothoptions is subject to a five-year MACRS property class. Answer thefollowing questions:
Which option would you recommend? Show the work that backs yourchoice.
What value of MARR would make each solution break even?
What would be the amount of additional revenue that Solution Ashould generate to make the Manager of Engineering indifferent tothe choice between the two options.

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4.1 Ratings (844 Votes)

Solution A Formula Year n 0 1 2 3 4 5 Initial cost IC 90000 Annual savings S 48000 48000 48000 48000 48000 Annual OM costs 22000 22000 22000 22000 22000 Depreciation rate r 20 32 1920 1152 1152 Depreciation D 18000 28800 17280 10368 10368 SOMD EBIT 8000 2800 8720 15632 15632 40EBIT Tax 40 3200 1120 3488 6253 6253 EBITTax Net income NI 4800 1680 5232 9379 9379 Add depreciation D 18000 See Answer

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Transcribed Image Text

You were asked by the Manager of Engineering to propose asolution for a current production line problem. After analyzing theissues you came up with two solutions, both of which will solve theproblem for the next five years. Solution A would initially cost$90,000, have annual O&M costs of $22,000 and will generateannual savings of $48,000, while solution B will need an initial$62,000, $17,000 for annual O&M costs, and will generate annualsavings of $36,000. Both will have salvage values, $15,000 forsolution A, and $10,000 for B. Your company’s marginal income taxrate is 40%, and its MARR is 10%. The proposed equipment for bothoptions is subject to a five-year MACRS property class. Answer thefollowing questions:Which option would you recommend? Show the work that backs yourchoice.What value of MARR would make each solution break even?What would be the amount of additional revenue that Solution Ashould generate to make the Manager of Engineering indifferent tothe choice between the two options.