Nuclear safety devices installed several years ago have been depreciated from a rst cost of...
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Accounting
Nuclear safety devices installed several years ago have been depreciated from a rst cost of
$200,000 to zero using MACRS. The devices can be sold on the used equipment market for an
estimated $15,000. Or they can be retained in service for 5 more years with a $9000 upgrade
now and an AOC of $6000 per year. The upgrade investment will be depreciated over 3 years with no salvage value. The challenger is a replacement with newer technology at a rst cost of
$40,000, n = 5 years, and S = 0. The new units will have operating expenses of $7000 per year.
(a ) Use a 5-year study period, an effective tax rate of 40%, an after-tax MARR of 12% per
year, and an assumption of classical straight line depreciation (no half-year convention) to per-
form an after-tax replacement study. ( b ) If the challenger is known to be salable after 5 years
for an amount between $2000 and $4000, will the challenger AW value become more or less
costly? Why?
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