This equipment has a present MV of RM100,000 and a BV of RM50,000. It has five more years of depreciation available under MACRS (ADS) of RM13,000 per year for four years and RM20,000 in year five. (The original recovery period was nine years.) The estimated MV of the equipment five years from now is RM70,000. The total annual operating and maintenance expenses are averaging RM30,000 per year.

New incinerator is considered to be leased. Estimated annual operating expenses for the new equipment is RM25,000 per year. The annual leasing costs would be RM30,000. The MARR (after taxes) is 12% per year, t = 40%, and the analysis period is five years.

BEFORE TAX ANALYSIS

PW(defender) in RM=

PW(challenger) RM= Justification =

After tax analysis

CASHFLOW TABLE FOR DEFENDER in microsoft word document

CASHFLOW TABLE FOR CHALLENGER in microsoft word document

NEW CASHFLOW FOR DEFENDER-CHALLENGER in microsoft word document

PW(12%) (DEFENDER-CHALLENGER) =

PW= (DEFENDER-CHALLENGER) =

IRR =

i) Using the before-tax MARR of 12% and a study period of 5 years, should the incinerator be replaced ? (neglect the depreciation, book value and tax)

ii) If the MARR (after taxes) is also 12% per year, at t = 40%, and the analysis period is five years, should the new equipment be leased? Base your answer on the after tax analysis and incremental cash flow (IRR-technique).