A company, in the 40% combined federal/state tax bracket, is considering the purchase of a CAD system at a price of $55,000. It is anticipated that it will yield benefits of $10,000 in Year 1, $15,000 in Year 2, $20,000 in Year 3, and $20,000 in Year 4. The CAD system is to be depreciated using the MACRS method, with a recovery period of 5 years. It is expected that the CAD system will be sold at the end of the fourth year at 20% of its purchase price.

1. Has this asset been correctly classified? Justify your answer (be specific). (In subsequent parts, use the depreciation method and classification specified even if you do not believe this to be the correct approach.)

2. Can the purchase be economically justified if the after-tax MARR is 10%? Justify your answer.

3. What is the tax on the disposal transaction?

4. What is the maximum price the company can pay for the purchase to be economically justified?

Thanks!