Three years ago a semi-automated material handling system was purchased for the DC of a retailer located in Northwest Arkansas. It cost $650,000 plus $75,000 of installation and training cost at that time. The equipment was financed with a loan at 10% per year to be paid in four equal annual payments with the last payment due this coming year (year 1 of your cash flow). The equipment had an estimated life of 10 years, and O&M costs of $70,000 for the first year, increasing by a gradient series of $5,000 per year thereafter. The MHS system has a MACRS-GDS 7-year property class. The equipment was originally thought to have a salvage value of $30,000 at the end of 10 years but is now believed to have a current market value of $45,000 if sold at this time (now). With RFID technology and by the expectation of the companys main customer a new material handling (MHS) that incorporates RFID is under consideration. The new MHS will have a cost of $900,000 plus $100,000 of installation and training costs. The equipment will be financed 30% with companys equity money and the rest with a loan to be paid in 5 equal annual payments at an interest rate of 5% per year. The operating costs will be $10,000 in the first year increasing by 3% per year thereafter, and the maintenance costs will be a gradient series of $4,000 but the equipment supplier had agreed to cover the maintenance costs during the first two years. The salvage value of the new material handling system is expected to be initial cost basis * (0.85^t) aftert years. The after-tax MARR is 10 percent, the tax rate is 35 percent, and the planning horizon is 8 years.

a. Clearly show the cash flow profile for each alternative using the insiders approach.

b. Using an EUAC and a cash flow (insiders viewpoint), decide which is the more favorable alternative.

c. Using an EUAC, the insider approach, and assuming that Section 1031 like-kind property exchange is used, determine the more favorable alternative.