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 | $ | 220,000 | | | | (?) | |
| Current purchase price | | N/A | | | $ | 550,000 | |
| Current salvage value of existing asset | $ | 44,000 | | | | N/A | |
| Current book value of existing asset | $ | 66,000 | | | | N/A | |
| Expected useful life (years) | | 6 | | | | 6 | |
| Expected salvage value, end of year 6 | $ | 11,000 | | | $ | 110,000 | |
| |
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 $66,000 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.)
Appendix C.Table 1.pdf-Adobe Acrobat Reader DC File Edit View Window Help Sign In Share Home Tools Winter 2019 Weekl... APP C Table_2.pdf Appendix C_Table._..x 80% Presrat Value o $1 Periods4% 9% 6% 7%10% 11% 12% 13% 14% 5%200% 25% 30% 962 0.932 0.945 0953 0.920 0.917 0.909 0.901 0.S93 0.S53 0.577 0.570 0.535 0.SU0 0.769 2 0.925 0907 0 390 0373 0357 0.042 0326 0.312 0.797 0763 0769 0.756 0694 0640 0592 3 agg9 0.S04 O.S40 0S16 0.794 .772 0.751 0.731 0.712 0093 0.075 0.051 0.579 0512 0.453 4 0355 0323 0792 0 763 0735 0 703 0683 0659 0536 0613 0592 0572 0482 0410 0350 50322 0754 0747 0 713 0631 0.650 0621 0.593 0567 0343 0319 0497 0 402 0325 0.269 6 0790 0746 0705 0666 0630 0596 0 564 0535 0.507 0460 0456 0432 0335 0 262 0207 7 0.7S0 0.711 0 665 0623 0 533 0.547 0513 0.432 0.452 0425 0400 0.376 0 279 0210 0.159 0 731 0677 0627 0532 0540 0502 0 467 0434 0404 0376 0351 0327 0233 0168 0123 9 03 06-45 0 392 OS44 0300.460 0 424 0 391 0.361 0333 0303 0284 0194 0134 0094 10 0676 0614 0558 050 0463 0422 0 386 0352 0322 0295 0270 0247 0162 0107 0073 11 0.650 0585 0527 0475 0429 388 0350 0.317 0287 0261 0237 0215 0.135 0096 006 12 0625 0557 0497 0444 0397 356 0 319 020.257 0231 0203 0187 0112 0069 0043 13 0.601 0.530 0.489 0415 0.363 0.326 0290 0.235 0.229 0204 0.182 0.163 0.093 0.055 0.003 4 0377 0.303 0442 0335 0.340 0.299 0 203 0.232 0.203 0.181 0100 0.141 0073 0044 0023 15 0555 0481 0417 0362 0.315 0.275 0239 0.209 0.133 0160 0.140 0.123 0065 0035 0.020 16 0534 0433 0394 0330 0 292 0.252 0215 0133 0163 0 141 0123 0 107 0054 0028 0013 0513 0436 0371 0317 0 270 0.231 0.19S 0.IT0 0.146 0.125 0.10S 0.093 0045 0023 0012 13 0404 0416 350 0296 0230 212 0130 a 153 0130 0111 0005 onal asa 0018 0009 19 0475 0.396 0.331 0277 0232 0.194 0.164 0.13 0.116 0098 0.003 0070 0031 0014 0007 20 0456 0377 312 0?5B 0215 a 17 01JO 0124 0101 067 0073 0061 026 0012 0005 22 0 422 0342 0278 0226 01$4 0 150 0123 101 0003 0068 0056 0046 000007 0003 24 0390 0.310 0.247 0197 0.153 0.126 0.102 0032 0.066 0053 0043 0.035 0013 0005 0002 25 0375 0 295 0233 0 184 0146 0116 0092 004 0059 0047 0038 0030 0010 0004 0001 30 0308 0.231 0.174 0131 009 0075 0057 0.044 0033 0026 0.020 0.015 0004 0001 0000 35 0253 0181 0.130 00 0068 0049 0036 0026 0019 0014 0010 0.00 0002 0000 0000 40 0205 0.142 0.097 005 0040 0.052 0022 0.013 0.011 O.003 oo0S 0.004 0.001 00000.000 5 2 I> 1:15 PM ENG 3/16/2019 APP C Table 2.pdf - Adobe Acrobat Reader DC File Edit View Window Help Sign In Home Tools Winter 2019 Weekl... APP_C_Table_2.pdf dix_C_Table_ Share TABLE 2 Present Valne of Annulty of 1 D Export PDFA Petods4% 5% 6% 7% 8 9 10% 11% 1.2% 13% 14%L5%2025% 30% 1 0.962 0.952 0.943 0.935 0926 0.917 0.909 0.901 0.093 0.335 0877 0.370 0.833 0.800 0.769 2 SS6 185 1833 1808 173 1.759 1.736 1713 1.600 166 1647 1626 1.528 1.440 1.361 3 2775 2723 2673 2624 25T7 2531 24 72444 240223612 322 2233 2106 1952 Isi6 4 3630 3546 3.465 337 3312 3.240 3170 3.102 3.037 2 974 2914 2855 2589 2.362 2.166 5 4452 4.329 4212 .100 3993 390 3.791 3696 3.605 3.517 3433 3352 2.991 2.609 2436 6 5.242 5.076 4.917 4.767 4623 4.486 4.355 4.231 4.111 3.998 3.09 3.784 3.326 2.951 2.643 7 6002 5.786 5.582 53S9 5206 5033 4S6S 4712 4.564 4.423 4.284160 3.605 3161 2S02 6733 6463 6.210 5971 3747 535 5.335 5146 4.965 4799 4639 4457 3.837 3329 2925 7435 7103 6302 6515 6247 5995 5759 5537 5.328 5.132 4946 4 772 4.031 3463 3019 10 . 111 7.722 7.360 7024 6710 641 $6.145 5.839 5.650 5426 5.216 5019 192 3.571 3.092 8.760 .306 7.0S7 7.499 139 6.805 6.495 6.207 5.938 5.687 5453 5.234 4.327 3.656 3.147 12 3S5363 8.3S4943 7536 7. 1616.S14 6492194 591S5060 5.421 4.439 3.725 3190 13 9936 9394 3.353 3353 904 7.48771036 7500.4246 122 3.342 5533 4.5333.750 3223 4 10563 999 9295 745 244 7 786 7 367 6 932 6628 6302 6002 5.724 4611 3024 3249 15 11.118 10.380 9712 9108 8559 8061 7.606 7191 6311 6462 6 142 5.47 4675 3.059 3.260 16 11.652 10.83G 10.106 9447 8851.313 7 824 7.379 6974 6.604 6 265 5954 4.730 3687 3.283 17 12100 11 274 10. 477 9763 9122 S.544 S022 7.547.120 6.729 6373 6047 4.775 3.910 3.295 13 12.659 11 690 ]0.323 10059 9372 S 756 3201 7.702.250 6S40 6467 6128 4312 3925 3304 19 13.134 12.005 11.150 10336 9604 .950 3.365 7.139 7.366 6.930 6.550 6.190 4.043 3.942 J311 20 13.590 12462 11.470 10.594 9818 9.129 8.514 7963 7.469 7.025 6 623 6.259 4.870 3.954 3.316 22 14 451 13163 12042 11061 10201 9442 3772176645 7 170 6743 6359 4909 3970 3323 24 15247 13 799 12 550 11 469 10529 9707 3905 34B 7784 7233 6835 6434 4937 3961 3327 25 15.622 14.094 12.783 11.654 10675 9823 9.077 8.422 7.843 7.330 6573 6.464 4.943 3.933 3.329 30 17.292 15.372 13.765 12.409 1125 10.274 9427 .694 3.055 7.496 7.003 6.566 4.979 3.995 3.332 35 18665 16.374 14498 12948 11 655 10567 9.44 8 855 8.176 7.586 7.070 6617 4992 3.998 3333 40 19793 17159 15046 13332 11 925 10?57 9779 951 3244 7634 7105 6642 4997 3999 3333 Adobe Export PDF Convert PDF Files to Word or Excel Online Select PDF File APP.C.Table 2pdfX Convert to Microsoft Word (docx) Document Language: English (U.S) Change Convert Create PDF vate WinConvert and edit PDFs with Acrobat Pro DC ngs to activa Start Free Trial 1:15 PM 3/16/2019 A ENG
