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 companys pre-tax WACC (discount rate) is estimated as 10%. The following data are pertinent to the question youve been asked to analyze:

Existing Asset Replacement

Annual (pretax) variable operating expenses $ 270,000 (?)

Current purchase price N/A $ 740,000

Current salvage value of existing asset $ 55,000 N/A

Current book value of existing asset $ 82,000 N/A

Expected useful life (years) 6 6

Expected salvage value, end of year 6 $ 13,000 $ 130,000 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? In answering this question, use the appropriate PV factor(s) from Appendix C, Table 1 and the appropriate PV annuity factor from Appendix C, Table 2. (Round your answer to the nearest whole dollar amount.)

2. Assume now that the company expects, over the coming 6 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 net book value of the existing asset is $82,000 and that the after-tax WACC (discount rate) for Mendoza is 8%. Finally, assume that the company will use straight-line depreciation, with no salvage value, for income tax purposes. In this situation, what is the maximum amount of variable operating costs (on both a pre-tax and on an after-tax basis) that can be incurred in order to make the proposed purchase attractive in a present-value sense? In answering this question, use the appropriate PV annuity factor from Appendix C, Table 2. (Round your answers to the nearest whole dollar amount.)