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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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