Question
A healthcare facility's IT department is faced with the opportunity to replace its current telephone control system, which has a commercial value of $45,000 if
A healthcare facility's IT department is faced with the opportunity to replace its current telephone control system, which has a commercial value of $45,000 if retired immediately. Additional information shows that its book value at this time is $12,500. The new computerized control system has a total purchase cost of $450,000 with a useful life of 10 years, however, its tax category classifies it as an asset with a tax life of 7 years under the maximum percentage method.
The operating cost of the new system is estimated at $40,000 for the first 5 years, and then increases at a rate of 10% annually for the rest of its useful life, that is, the operating costs of year 6 are equal to $44,000, the of year 7 is $48,400, and so on until the end of year 10. At the same time, the system will report additional income of $215,000 annually throughout its useful life.
Determine the Equivalent Annual Value (VAE) of the project if we consider a planning horizon of 10 years within which the company estimates an effective tax rate of 25%. Consider that the system can be settled in the market at $135,200 at the end of year 10 and the MARR of the organization is equal to 14% effective annual rate.
The answer is A: The Equivalent Annual Value of this investment is $67,325.
If you get a value other than 67325, it is wrong.
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