Five years ago a chemical plant invested $90,000 in a pumping station on a nearby river to provide the water required for their production process. Straight-line depreciation is employed for tax purposes, using a 30-year life and zero salvage value. During the past five years, operating costs have been as follows:
Maintenance....................$2,000 per year
Power and labor.................4,500 per year
Taxes and insurance.............1,000 per year
Total.............................$7,500 per year
A nearby city has offered to purchase the pumping station for $75,000 as it is in the process of developing a city water distribution system. The city is willing to sign a 10-year contract with the plant to provide the plant with its required volume of water for a price of $10,000 per year. Plant officials estimate that the salvage value of the pumping station 10 years hence will be about $30,000. The before-tax MARR is 10% per year. An effective income tax rate of 50% is to be assumed. Compare the annual cost (after taxes) of the defender (keep the pumping station) to the challenger (sell station to the city) and help plant management determine the more economical course of action.