Crane Manufacturing management is considering overhauling their existing line, which currently has both a book value and a salvage value of $0. It would cost $280,000 to overhaul the existing line, but this expenditure would extend its useful life to five years. The line would have a $0 salvage value at the end of five years. The overhaul outlay would be capitalized and depreciated using MACRS Over three years. The tax rate is 35 percent, the opportunity cost of capital is 14 percent. The NPV of the new production line is $-358,000. (Do not round discount factor. Round your intermediate calculations and final answer to the nearest dollar, e.g. 5,275.) EXHIBIT 11.7 MACRS Depreciation Schedules by Allowable Recovery Period The MACRS schedule lists the tax depreciation rates that firms use for assets placed into service after the Tax Reform Act of 1986 went into effect. The table indicates the percentage of the cost of the asset that can be depreciated in each year during the period that it is being used. Year 1 is the year in which the asset is first placed into service. Year 3-Year 5-Year 7-Year 10-Year 15-Year 20-Year 1 33.33% 20.00% 14.29% 10.00% 5.00% 3.75% 2 44.45 32.00 24.49 18.00 9.50 7.22 3 14.81 19.20 17.49 14.40 8.55 6.68 4 7.41 11.52 12.49 11.52 7.70 6.18 5 11.52 8.93 9.22 6.93 5.71 6 5.76 8.92 7.37 6.23 5.29 7 8.93 6.55 5.90 4.89 4.46 6.56 5.90 4.52 9 6.55 5.91 4.46 10 3.28 5.90 4.46 11 5.91 4.46 12 5.90 4.46 13 5.91 4.46 14 5.90 4.46 15 5.91 4.46 16 2.95 4.46 17 4.46 18 4.46 19 4.46 20 4.46 21 2.24 Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 8 NPV of renovating old line Should Crane replace or renovate the existing line? Crane should the existing line. Crane Manufacturing management is considering overhauling their existing line, which currently has both a book value and a salvage value of $0. It would cost $280,000 to overhaul the existing line, but this expenditure would extend its useful life to five years. The line would have a $0 salvage value at the end of five years. The overhaul outlay would be capitalized and depreciated using MACRS Over three years. The tax rate is 35 percent, the opportunity cost of capital is 14 percent. The NPV of the new production line is $-358,000. (Do not round discount factor. Round your intermediate calculations and final answer to the nearest dollar, e.g. 5,275.) EXHIBIT 11.7 MACRS Depreciation Schedules by Allowable Recovery Period The MACRS schedule lists the tax depreciation rates that firms use for assets placed into service after the Tax Reform Act of 1986 went into effect. The table indicates the percentage of the cost of the asset that can be depreciated in each year during the period that it is being used. Year 1 is the year in which the asset is first placed into service. Year 3-Year 5-Year 7-Year 10-Year 15-Year 20-Year 1 33.33% 20.00% 14.29% 10.00% 5.00% 3.75% 2 44.45 32.00 24.49 18.00 9.50 7.22 3 14.81 19.20 17.49 14.40 8.55 6.68 4 7.41 11.52 12.49 11.52 7.70 6.18 5 11.52 8.93 9.22 6.93 5.71 6 5.76 8.92 7.37 6.23 5.29 7 8.93 6.55 5.90 4.89 4.46 6.56 5.90 4.52 9 6.55 5.91 4.46 10 3.28 5.90 4.46 11 5.91 4.46 12 5.90 4.46 13 5.91 4.46 14 5.90 4.46 15 5.91 4.46 16 2.95 4.46 17 4.46 18 4.46 19 4.46 20 4.46 21 2.24 Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 8 NPV of renovating old line Should Crane replace or renovate the existing line? Crane should the existing line
