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Need handwritten solution only 2. Lehman-Roberts, Inc. is investigating the possibility of purchasing a new Los Angeles Abrasion Machine. They have narrowed their choice to
Need handwritten solution only
2. Lehman-Roberts, Inc. is investigating the possibility of purchasing a new Los Angeles Abrasion Machine. They have narrowed their choice to two alternate machines. The LA Abrasion Machine manufactured by Test Mark has an initial cost of $8,000, a useful life of five years with a salvage value of $800. The anticipated operating and maintenance cost of the Test Mark machine is $1,300 per year. The Test Mark machine is eligible for a three-year MACRS property class. The other alternate manufactured by Gilson has an initial cost of $10,500, a useful life of five years with a salvage value of $1,000. The Gilson machine is anticipated to have an annual cost of use and maintenance of $1,100 per year. This machine also qualifies as a three-year MACRS property class. The income generated by the Test Mark machine is expected to be $4,000 per year. The income generated by the Gilson Machine is expected to be $4,250. The IRS has recently announced that a corporation can take advantage of an Investment Tax Credit for 2019 if the initial cost of the asset is greater than $10,000. The IRS will allow an Investment Tax Credit equal to 5% of the initial cost of the asset if its initial cost is over $10,000. The Investment Tax Credit is credited in the first year of taxation. The IRS requires that if the ITC is taken then the unadjusted basis must be decreased by 50% of the ITC when computing depreciation allowances. Cost Engineers at Lehman-Roberts will take advantage of the ITC in their analysis. Assume an income tax rate and depreciation recapture rate of 25%. Using an after-tax rate of 8% per year, determine which instrument, if any, should be selectedStep by Step Solution
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