Question: Kaufman Chemical is estimating the buy of a new multistage centrifugal compressor for its wastewater treatment operation which costs $750,000 & requires $57,000 to install. This outlay would be partially offset by the sale of an existing compressor originally purchased 5 years ago for dollar 490,000. It is being depreciated using a 5year recovery schedule under ACRS & can currently be sold for dollar 150,000. The existing compressor's maintenance costs are raising, & the new compressor could decrease operating costs before depreciation & taxes by $280,000 yearly for the next five years. The new equipment will be depreciated under a 5 year recovery schedule using ACRS [schedule given below]. The firm has an 18 percent cost of capital and a 40 percent tax of ordinary and capital gain income.
Estimate whether Kaufman Chemical should replace its existing wastewater treatment equipment with the new compressor. [Do not consider the terminal price of the new compressor in your analysis.]
|
Year
|
Depreciation of
Existing Equipment
|
Depreciation
of New Equipment
|
Incremental
Depreciation
|
|
1
|
0.05 ´ $490,000 = $24,500
|
0.20 ´ $807,000
|
=
|
$161,400
|
$136,900
|
|
2
|
0
|
0.32 ´ $807,000
|
=
|
258,240
|
258,240
|
|
3
|
0
|
0.19 ´ $807,000
|
=
|
153,330
|
153,330
|
|
4
|
0
|
0.12 ´ $807,000
|
=
|
96,840
|
96,840
|
|
5
|
0
|
0.12 ´ $807,000
|
=
|
96,840
|
96,840
|
|
6
|
0
|
0.05 ´ $907,000
|
=
|
40,350
|
40,350
|