A Nuclear Power Plant Is Planning to Replace the Outdated

question 20

Essay

A nuclear power plant is planning to replace the outdated equipment with more environmental- friendly equipment. The new equipment has an initial cost of $410,000. The equipment is expected to yield an annual savings of $190,000 each year for the first 4 years and $191,200 each year thereafter. The MACRS with a 15- year recovery period is to be used for tax purposes. Should the equipment be purchased if the equipment will be sold for $148,263.00 at the end of year 10? Assume an effective tax of 38% and a before- tax MARR of 16.13% per year.

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Definitions:

Effective Rate

The actual interest rate of an investment or loan, taking into account the effect of compounding interest as opposed to the nominal or stated rate.

Annuity

A monetary product designed to deliver regular payouts, mainly aimed at funding retirees' income needs.

Compounded Monthly

A compound interest calculation method where interest is added to the principal balance each month.

RRSP

Registered Retirement Savings Plan, a Canadian financial vehicle for individuals to save for retirement on a tax-sheltered basis.