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Please show me the calculation. Thank you Sensitivity Analysis; Equipment-Replacement Decision The Mendoza Company discussed in the chapter is now considering replacing a piece of
Please show me the calculation. Thank you
Sensitivity Analysis; Equipment-Replacement Decision The Mendoza Company discussed in the chapter is now considering replacing a piece of equipment that the company uses to monitor the integrity of metal pipes used for deep-sea drilling purposes. The company's pretax WACC is estimated as 10%. The following data are pertinent to the question you've been asked to analyze Annual (pretax) variable operating expenses Current purchase price Current salvage value Expected useful life (years) Expected salvage value, end of year 6 Existing Asset $200,000 NA $40,000 6 $10,000 Replacement (?) $500,000 N/A 6 $100,000 Required 1. What is the maximum amount of annual variable operating expenses, pretax, that would make this an attractive investment from a present-value standpoint? 2. Assume now that the company expects, over the coming six years, to be subject to a combined income tax rate of 35%, including any gain/loss realized on the sale of the existing equipment. Assume that the current book value of the existing asset is $60,000 and that the after-tax WACC for Mendoza is 8%. Finally, assume that the company will use SL depreciation, with no salvage value, for income tax purposes. In this situation, what is the maximum amount of variable operating costs that can be incurred in order to make the proposed purchase attractive in a present-value senseStep by Step Solution
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