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

Question:

Fred's Rodent Control 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 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 is 20%? You do not have to calculate the incremental rate of return; just show how you reach your decision.
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