Three years ago, a pick and place robot was purchased for the express purpose of loading pieces into a machining large, complex parts used in commercial and military aircraft worldwide. It cost $250,000 + $75,000 in installation costs, had an estimated life of 15 years, and O&M costs of $50,000 for the first year, increasing by 10% per year thereafter. The 3 years have been depreciated for tax purposes as MACRS-GDS 7-year property. The pick and place robot was originally thought to have a salvage value of 10% of the total initial cost without installation at the end of 15 years but is now believed to have a remaining life of only 8 years with a salvage value of 20% at that time. With business booming, the existing robot is no longer sufficient to meet production needs. It is supplemented by leasing an additional robot with a lease paid at the beginning of each year for $5,000 per year and has O&M costs of $35,000 per year. As an alternative, a larger, faster, and with more degrees of freedom robot can be used alone to replace the current machine. It has a cash price of $850,000, O&M costs of $60,000 for the first year, increasing 3% per year thereafter, and a 15-year life. The new Scara robot will be acquired by financing 50% of the total cost with a loan to be repaid in 8 equal total principal payments plus interest at a rate of 3%. The existing pick and place robot can be sold on the open market for a maximum of $50,000. The salvage value of the new Scara robot is expected to be $850,000(0.80^t) after t years. The after-tax MARR is 10 percent, the tax rate is 40 percent, and the planning horizon is 8 years.

a). Clearly show the cash flow profile for each alternative using the insider’s approach.

b). Using an EUAC and a cash flow (insider’s viewpoint), decide which is the more favorable alternative using a planning horizon of 8 years.

c). Using an EUAC, the insider approach, and assuming that Section 1031 like-kind property exchange is used, determine the more favorable alternative.