5. 13.38 Apple Crisp Foods signed a contract some years ago for maintenance services on its fleet of trucks and cars. The contract is up for renewal now for a period of 1 year or 2 years only. The contract quote is $300,000 per year if taken for 1 year and $240,000 per year if taken for 2 years. The VP for Finance wants to renew the contract for 2 years without further analysis, but the VP for Engineering believes it is more economical to perform the maintenance inhouse. Since much of the fleet is aging and must be replaced in the near future, a fixed 3-year study period has been agreed upon. The estimates for the inhouse (challenger) alternative are as follows:

Table Summary: Table divided into two columns compares a contract based on the time period and the effective tax rate. Column 1 notes the list of account heads. Column 2 represents the corresponding values. First cost, $ −800,000 AOC, $ per year −120,000 Life, years 4 Estimated selling price Loses 25% of P annually (year 1: $600,000; year 3: $200,000; year 4: 0) MACRS depreciation 3-year recovery period The effective tax rate is 35% and the after-tax MARR is 10% per year. Perform an after-tax AW analysis, and determine which VP has the better economic strategy over the next 3 years.