After-Tax Analysis of Alternatives with Unequal Lives
A firm must decide between two system designs, S1 and S2, whose estimated cash flows are shown in the following table. The effective income tax rate is 40% and MACRS (GDS) depreciation is used. Both designs have a GDS recovery period of five years. If the after-tax desired return on investment is 10% per year, which design should be chosen?
Design | ||
S2 | S1 | |
$200,000 | $100,000 | Capital investment |
6 | 7 | Useful life (years) |
$60,000 | $30,000 | MV at end of useful life |
$40,000 | $20,000 | Annual revenues less expenses |