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Kaufman Chemical is evaluating the purchase of a new multi-stage centrifugal compressor

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Question

Kaufman Chemical is evaluating the purchase of a new multi-stage centrifugal compressor for its wastewater treatment operation that costs $750,000 and requires $57,000 to install. This outlay would be partially offset by the sale of an existing compressor originally purchased five years ago for $490,000. It is being depreciated using a five-year recovery schedule under ACRS and can currently be sold for $150,000. The existing compressor?s maintenance costs are increasing, and the new compressor could reduce operating costs before depreciation and taxes by $280,000 annually for the next five years. The new equipment will be depreciated under a five-year recovery schedule using ACRS. The firm has an 18% cost of capital and a 40% tax of ordinary and capital gain income.;Evaluate whether Kaufman Chemical should replace its existing wastewater treatment equipment with the new compressor. (Do not consider the terminal value of the new compressor in your analysis.)

 

Paper#23475 | Written in 18-Jul-2015

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