Case 26 Molehill & Mountain Movers Cathy has one year left before she completes her degree in industrial engineering. She is spending this summer working for her family's rm, 1V[MNI (Molehill & Mountain Movers). lV[MM runs a eet of heavy construction equipment and sells gravel for roadwork om its pit. They are opening a new section of the pit, and they must choose between conveyor and frontend loader systems for loading the trucks. In the past they have used frontend loaders. The rm's CPA has asked Cathy to analyze the after-tax cost of the two choices. Her task is complicated by uncertainty over the depreciation portion of the tax code. It is up for revision once again (the prolonged business boom has raised the pressure for increasing business taxes). Thus the system may be depreciated under (a) straight line, (b) sum-ofthe-year's digits (SOYD), (c) double declining balance, or (d) modied accelerated costrecovery system MACRS). The current tax system does not have a special rate for capital gains, but it may be reinstituted at a rate of 66.67%. The other complicating factor is the effect of ination, which the CPA said can be assumed to affect all numbers equally%xcept for tax calculations based on book values. At least the CPA simplied the task by dening the after-tax rate of retum as 6%, and the tax rate as 40%. The CPA asked for a recommended decision based on Table 261. 129 Cases in Engineering Economy 2"d by Peterson & Eschenbach Table 26-1 Cost Summary for Conveyor and Front-End Loader Front-end Conveyor Loader First cost $250,000 $110,000 Salvage value $80,000 $30,000 Life 15 years 15 years Operation cost $32,000 $45,000 Options 1. Compare the equivalent uniform annual costs (EUAC) for the conveyor and the loader assuming that inflation is 0% under four depreciation methods: (1) straight line, (2) SOYD, (3) double declining balance, and (4) MACRS. Do the different depreciation methods have similar impacts on the conveyor and the loader? 2. Assuming that inflation is 10%, use the same four depreciation methods and redo option 1. Graph the EUACs for each depreciation method as a function of the inflation rate, between 0% and 15%. 4. Compare the relative sensitivity of the inflation rate, the annual operation cost, the tax rate, variations in the first cost or salvage, and the choice of depreciation method.Case 26 Molehill & Mountain Movers Suggestions to the Student 1. Assume that MMM is protable so that costs and depreciation are deductible from taxable income. 2. The Excel function that can calculate MACRS depreciation is VDB. This allows declining balance with a switch to straight-line and no salvage value. For the time period arguments see your text. (Excel's DB function makes different assumptions.)