Engineering Economy Assignment
1. Kermit is planning to buy a car. He is interested in buying a Studebaker for his transportation needs. Studebaker has two models of cars - one that uses gasoline and another that uses diesel. The gasoline model has a fuel economy of 32 miles per gallon (mpg) and requires $3000 in annual maintenance. The diesel model on the other hand has a fuel economy of 44 miles per gallon (mpg) and requires $3,250 in annual maintenance. The price of the Gasoline and Diesel models are $18,995 and $19,995, respectively. The price of gasoline is $2.75/gallon (assume gasoline and diesel prices are stable over the planning horizon).
Kermit on average drives 15,000 miles per year and intends to keep the car for 10 years. He uses a personal MARR of 8%.
a. If the price of diesel and the price of gasoline are the same, which model should Kermit buy?
b. At what price of diesel fuel per gallon, will Kermit incur equal annual costs irrespective of the model of car chosen? What does this mean to Kermit's decision?
Statement: At $2.61 per gallon of diesel fuel, both options are equivalent. This means if price of diesel fuel is less than $2.61/ gallon, the diesel model is the better option.
2. Your company purchases a computer server for $30,000 and it is expected to have a zero salvage value at the end of its 5-year useful life. Compute the depreciation schedule and book value for the equipment using double declining balance (200% DDB) with a switch to SL (if necessary) method.
α = 1/N * Multiplier = 1/5 *2 = 0.4
|
Bn-1
|
DDB
|
SL
|
DDB or SL?
|
Dep.
|
Bn
|
|
0
|
|
|
|
|
|
$ 30,000.00
|
|
1
|
$ 30,000.00
|
$ 10,000.00
|
$ 6,000.00
|
DDB
|
$ 10,000.00
|
$ 15,000.00
|
|
2
|
$ 15,000.00
|
$ 6,000.00
|
$ 3,750.00
|
DDB
|
$ 6,000.00
|
$ 9,000.00
|
|
3
|
$ 9,000.00
|
$ 3,600.00
|
$ 3,000.00
|
DDB
|
$ 3,600.00
|
$ 5,400.00
|
|
4
|
$ 5,400.00
|
$ 2,160.00
|
$ 2,700.00
|
SL
|
$ 2,700.00
|
$ 2,700.00
|
|
5
|
$ 2,700.00
|
$ 1,080.00
|
$ 2,700.00
|
SL
|
$ 2,700.00
|
$ -
|
3. A lumber company purchases and installs a wood chipper for $200,000. The chipper is classified as MACRS 7-year property. Its useful life is 10 years. The estimated salvage value at the end of 10 years is $25,000. What is the first-year MACRS depreciation? (Show your work. Provide a statement)
4. What is the correctly calculated tax due on a corporate taxable income of $12,000,000? What is the effective tax rate? (Show your work. No statement required)
5. Corleone Inc. is considering adding some automatic equipment to its production facilities. An investment of $100,000 will produce an initial annual benefit of $36,000, but the benefits are expected to decline $2,000 per year, making second-year benefits $34,000, third-year benefits $32,000, and so forth. The firm uses straight-line depreciation, an 8-year useful life and no salvage value at the end of the 8 years. Corleone Inc.'s tax rate is 36%. Complete the table below.
|
Year
|
Before-Tax
Cash Flow
|
Straight-Line Depreciation
|
Taxable
Income
|
Income Taxes
|
After-Tax
Cash Flow
|
|
0
|
-100000
|
|
|
|
-100000
|
|
1
|
36000
|
12500
|
23500
|
8460
|
27540
|
|
2
|
34000
|
12500
|
21500
|
7740
|
26260
|
|
3
|
32000
|
12500
|
19500
|
7020
|
24980
|
|
4
|
30000
|
12500
|
17500
|
6300
|
23700
|
|
5
|
28000
|
12500
|
15500
|
5580
|
22420
|
|
6
|
26000
|
12500
|
13500
|
4860
|
21140
|
|
7
|
24000
|
12500
|
11500
|
4140
|
19860
|
|
8
|
22000
|
12500
|
9500
|
3420
|
18580
|
6. Continuing from Problem 5 - IfCorleone Inc.'s After Tax MARR is 10%, should this project be funded? (Show your work and provide a statement)
At interest rate of 10%, the NPW is positive. Therefore, Corleone Inc. will obtain the desired 10% after-tax ROR. Yes fund the project.
7. RR must build a tunnel to maintain his access around the mountain. The tunnel could be fabricated of normal steel for an initial cost of $30,000 and should last for 10 years. Maintenance will cost $1,000 per year.
Another option would be to use corrosion resistant steel, which will last for 10 years, with annual maintenance cost of $100. In 10 years there would be no salvage value for either tunnel. RR pays combined federal and state taxes at the 50% effective rate and uses straight-line depreciation. If the after tax MARR is 8%, what is the maximum amount that should be spent on the corrosion-resistant tunnel?
Attachment:- Assignment File.rar