Five years ago, ARCHON, a regional architecture/contractor firm, purchased an HVAC unit for $25,000. It is expected to last 10 more years with a net salvage value of $0 at the end of that time. Depreciation over the 5 years has been as MACRS-GDS 7-year property. The annual operating cost of this unit started at $2,000 in the first year and has increased steadily at $250 per year ever since; last year the cost was $3,000. ARCHON has been phenomenally successful due to their reputation for highly functional, high-quality, cost-effective designs and construction. They are building a new wing at their regional headquarters to accommodate a much larger computer design emphasis requiring larger, faster computers, architectural printers, e-storage for a construction repository of previous designs, and an increased human heat load. They can buy an additional unit to air-condition the new wing for $18,000. It will have a service life of 15 years, a net salvage of $0 at that time, and a $3,000 market value after 10 years. It will have annual operating costs of $1,800 in the first year, increasing at $100 per year. As an alternative, ARCHON can buy a new replacement unit to heat and cool the entire building for $35,000. It will last for 15 years and have a net salvage of $0 at that time; however, it will have a market value of $8,500 after 10 years. It will have first-year operating costs of $3,700/year, increasing at $200 per year. The present unit can be sold now for $7,000. The after-tax MARR is 12 percent, the tax rate is 40 percent, and the planning horizon is 10 years.

a.	Clearly show the cash flow profile for each alternative using a cash flow approach (insider's viewpoint approach). (11.2.2)

b.	Using a PW analysis and a cash flow approach (insider's viewpoint approach), decide which is the more favorable alternative. (11.2.2)

c.

Using a PW analysis and a cash flow approach (insider's viewpoint approach), decide which is the more favorable alternative, except note that a Section 1031 like-kind property exchange is to be used. The equipment replaced will continue to be replaced by like-kind investments in the United States indefinitely. (11-4)