Roman Gardens is a famous upscale Italian restaurant operating is the little Italy area of Dallas, TX. It is part of certain large corporation known for gourmet international foods. It is headquartered in Chicago, IL and has several upscale restaurants (of international flavor) located in major cities throughout the world. The parent corporations composite tax rate is 40%; its Cost of Capital (before tax) is 20%. Capital Gains Tax Rate is expected to be same as ordinary income tax rate.

Roman Gardens is thinking of replacing existing equipment purchased few years ago with similar newer equipment.The replacement does not result in any increase in annual revenue (see foot note 1 below).We are interested in the economics of such a replacement.We will call the existing asset as the Defender, and the new one as Challenger.The information pertaining to the Defender and the Challenger are given below.

The defender was bought three years ago for $330,000. The firm began depreciating it immediately using 5-year MACRS method. The current market value of the defender is $70,000.

Estimated future market values are listed below.

Market Value, one year from today is estimated to be $40,000.

Market Value, two years from today is estimated to be $20,000.

Market Value, three years from today is estimated to be $5,000.

Market Value, four years from today is estimated to be $3,000.

Market Value, five years from today and beyond is estimated to be $0

The defender equipments maintenance charge for the next year is estimated to be $18,000. Because of the age of the equipment the maintenance charges are expected to grow at an abnormal rate. The maintenance charges for next few years are estimated as follows.

Maintenance for year 1 = $18,000

Maintenance for year 2 = $21,000

Maintenance for year 3 = $29,000

Maintenance for year 4 = $37,000

Maintenance for year 5 = $48,000

Maintenance for year 6 = $52,000

Maintenance for year 7 = $57,000

Maintenance for year 8 = $70,000

Challenger

The challenger is a new similar equipment that costs $240,000. The item can be depreciated using 5-year life MACRS method.

Estimated future market values are listed below.

Market Value, one year from today is estimated to be $180,000.

Market Value, two years from today is estimated to be $140,000.

Market Value, three years from today is estimated to be $110,000.

Market Value, four years from today is estimated to be $90,000.

Market Value, five years from today is estimated to be $75,000

Market Value, six years from today is estimated to be $65,000

Market Value, seven years from today is estimated to be $50,000

Market Value, eight years from today is estimated to be $30,000

The challengers maintenance charge for the first three years is estimated to be $0 covered under warranty. The maintenance charges for next few years are estimated as follows.

Maintenance for year 1 thru 3 = $0

Maintenance for year 4 = $5,000

Maintenance for year 5 = $9,000

Maintenance for year 6 = $12,000

Maintenance for year 7 = $16,000

Maintenance for year 8 = $25,000

You need to compute the Net Annual Value (NAV) if the Asset is held for 1 year, 2 years, etc. Fill in the answers in the table below. Do After Tax Cash Flow Analysis only. Use the template provided.

	1 year	2 years	3 years	4 years	5 years	6 years	7 years	8 years
Defender
Challenger

What is your decision?