Fred's Rodent Control Corporation has been using a low-frequency sonar device to locate subterranean pests. This device

Question:

Fred's Rodent Control Corporation has been using a low-frequency sonar device to locate subterranean pests. This device was purchased 5 years ago for $18,000. The device has been depreciated using SOYD depreciation with an 8-year depreciable life and a salvage value of $3600. Presently, it could be sold to the cat next door for $7000. If it is kept for the next 3 years, its market value is expected to drop to $1600. A new lightweight subsurface heat-sensing searcher (SHSS) is available for $10,000 that would improve the annual net income by $500 for each of the next 3 years. The SHSS would be depreciated as a 5-year class property, using MACRS. At the end of 3 years, the SHSS should have a market value of $4000. Fred's Rodent Control is a profitable enterprise subject to a 40% tax rate.

(a) Construct the after-tax cash flow for the old sonar unit for the next 3 years.

(b) Construct the after-tax cash flow for the SHSS unit for the next 3 years.

(c) Construct the after-tax cash flow for the difference between the SHSS unit and the old sonar unit for the next 3 years.

(d) Should Fred buy the new SHSS unit if his MARR is 20%? You do not have to calculate the incremental rate of return; just show how you reach your decision.

Depreciation
Depreciation is an important concept in accounting. By definition, depreciation is the wear and tear in the value of a noncurrent asset over its useful life. In simple words, depreciation is the cost of operating a noncurrent asset producing... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... MARR
Minimum Acceptable Rate of Return (MARR), or hurdle rate is the minimum rate of return on a project a manager or company is willing to accept before starting a project, given its risk and the opportunity cost of forgoing other... Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...