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Joseph, a sole proprietor, is contemplating the replacement of an item of manufacturing plant. A recent investigation of plant available revealed two suitable models marketed under the names of ‘Innes’ and ‘Waugh’. Relevant information is listed below:
Innes
Waugh
Estimated life (years)
5
8
Estimated salvage value
$ 10,000
$ 20,000
Estimated cost
$ 60,000
$ 140,000
Estimated annual cash saving (before tax)
$ 20,000
$ 35,000
Depreciation pa
$ 10,000
$ 15,000
The existing plant, although depreciated to a book value of zero, has an estimated current net scrap value of $12,000.
Given a tax rate of 30% and an after-tax required rate of return of 10.5%, which model would you recommend Joseph accept?
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