6. Consider the following information associated with a 2 year old asset (the defender) with an original cost basis of $4,400:

Annual O&M costs: $10,000

Depreciation: 5 year MACRS GDS (2 years already taken)

Remaining life 3 years

Current market value $2,500

Market value in 3 years $0

a. Find the after tax cash flows (ATCFs) of this defender using an after-tax MARR of 12% and an effective tax rate of 40%.

b. If the best challenger has a known after-tax PW over 3 years of $-14,000 should the defender be replaced? Explain. Answer: PW of defender ATCFs is $-16,076 so yes replace.