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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
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 deepsea drilling purposes. The companys pretax WACC discount rate is estimated as The following data are pertinent to the question youve been asked to analyze:
Existing Asset Replacement
Annual pretax variable operating expenses $
Current purchase price NA $
Current salvage value of existing asset $ NA
Current book value of existing asset $ NA
Expected useful life years
Expected salvage value, end of year $ $
Required:
What is the maximum amount of annual variable operating expenses, pretax, that would make this an attractive investment from a presentvalue standpoint? In answering this question, use the appropriate PV factors from Appendix C Table and the appropriate PV annuity factor from Appendix C Table Round your answer to the nearest whole dollar amount.
Assume now that the company expects, over the coming years, to be subject to a combined income tax rate of including any gainloss realized on the sale of the existing equipment. Assume that the current net book value of the existing asset is $ and that the aftertax WACC discount rate for Mendoza is Finally, assume that the company will use straightline depreciation, with no salvage value, for income tax purposes. In this situation, what is the maximum amount of variable operating costs on both a pretax and on an aftertax basis that can be incurred in order to make the proposed purchase attractive in a presentvalue sense? In answering this question, use the appropriate PV annuity factor from Appendix C Table Round your answers to the nearest whole dollar amount.
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