Question 7.S: A drug store is looking into the possibility of installing a...

Engineering Economy [EXP-20136]

A drug store is looking into the possibility of installing a “24/7” automated prescription refill system to increase its projected revenues by $20,000 per year over the next 5 years. Annual expenses to maintain the system are expected to be $5,000. The system will have no market value at the end of its 5-year life, and it will be depreciated by the SL method. The store’s effective income tax rate is 40%, and the after-tax MARR is 12% per year. What is the maximum amount that is justified for the purchase of this prescription refill system?

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EOY	BTCF	Depreciation	Taxable Income	Income Tax	ATCF
0 1–5	−$P $15,000	— $P/5	— $15,000 − $P/5	— −$6,000 + 0.08P	−$P $9,000 + $0.08P

P ≤ $9,000(P/A, 12%, 5) + 0.08 P(P/A, 12%, 5)
P ≤ $32,443.20 + 0.2884 P
P ≤ $45,592 for the proposed system

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