Project Analysis Example 2





Kerry Back

  • The ABC company is considering upgrading some of its equipment to reduce operating costs. The new equipment would cost $2 million.
  • The operating savings are projected to be $500,000 per year for six years.
  • The new equipment would be in the 5-year MACRS class. The depreciation rates per year are 20%, 32%, 19.2%, 11.52%, 11.52%, and 5.76%.

  • The new equipment would be obsolete at the end of six years and have zero value net of disposal costs.
  • The existing equipment could be used for another six years. However, it has no market value: salvage value net of disposal costs would be zero. It has been fully depreciated.
  • The cost of capital is 10%.
  • The corporate tax rate is 30%.