Problem
Foghorn Leghorn may replace an old egg-sorting machine used by his business, Foggy's Farm Fresh Eggs. The old egg machine is not quite running eggs-actly the way it was originally designed and will require an additional investment now of $2500 (expensed at Time 0) to get it back in working shape. This old machine was purchased 6 years ago for $5000 and has been depreciated by the straight-line method at $500 per year. Six years ago the estimated salvage value for tax purposes was $1000. Operating expenses for the old machine are projected at $600 this next year and are increasing by $150 per year each year thereafter. Foggy projects that with refurbishing, the machine will last another 3 years. Foggy believes that he could sell the old machine as-is today for $1000 to his friend Fido to sort bones. He also believes he could sell it 3 years from now at the barnyard flea market for $500. The new egg-sorting machine, a deluxe model, has a purchase price of $10,000 and will last 6 years, at which time it will have a salvage value of $1000. The new machine qualifies as a MACRS 7-year property and will have operating expenses of $100 the first year, increasing by $50 per year thereafter. Foghorn uses an after-tax MARR of 18% and a tax rate of 35% on original income.
(a) What was the depreciation life used with the defender asset (the old egg sorter)?
(b) Calculate the after-tax cash flows for both the defender and challenger assets.
(c) Use the annual cash flow method to offer a recommendation to Foggy. What assumptions did you make in this analysis?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.