A manufacturing company has some existing semiautomatic production equipment that it is considering replacing. This equipment has a present MV of $55,000 and a BV of $27,000. It has five more years of depreciation available under MACRS? (ADS) of $6,000 per year for four years and $3,000 in year five. (The original recovery period was nine? years.) The estimated MV of the equipment five years from now is $19,000. The total annual operating and maintenance expenses are averaging $27,000 per year.
New automated replacement equipment would then be leased. Estimated annual operating expenses for the new equipment are $12,000 per year. The annual leasing costs would be $24,300. The MARR? (after taxes) is 5?%per? year,t equals=50?%, and the analysis period is five years.?(Remember?:The owner claims? depreciation, and the leasing cost is an operating? expense.) Based on an? after-tax analysis, should the new equipment be? leased? Base your answer on the IRR of the incremental cash flow.
a. The actual IRR of the incremental cash flow is ?
b. The challenger should be leased or rejected?