Question
The Tempo Golf and Country Club in London, Ontario, is evaluating two different irrigation system options. An underground automatic irrigation system will cost $9.2 million
The Tempo Golf and Country Club in London, Ontario, is evaluating two different irrigation system options. An underground automatic irrigation system will cost $9.2 million to install and $80,000 pre-tax annually to operate. It will not have to be replaced for 20 years. An aboveground system will cost $6.8 million to install, but $190,000 per year to operate. The aboveground equipment has an effective operating life of nine years. The country club leases its land from the city and both systems are considered leasehold improvements; as a result, straight-line capital cost allowance is used throughout, and neither system has any salvage value. Which method should we select if we use a 13 percent discount rate? The tax rate is 39 percent.
Problem 10 - 38 (page 378): Fill in the following: (use brackets or minus to show negative cash flows: Hint: straight line CCA deduction - same amount each year, no salvage value. Underground option PV of initial cost PV of after-tax costs Annual straight-line CCA depreciation PV of CCA tax deduction NPV Equivalent annual cost Above ground option PV of initial cost PV of after-tax costs Annual straight-line CCA depreciation PV of CCA tax deduction NPV Equivalent annual cost
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