# 1.             Hsieh-Hseih Inc

1.             Hsieh-HseihInc. must choosebetween two copiers: TheZZ20or the GG50. (The copierchosen will continue to be selected for the foreseeablefuture.)

The ZZ20costs \$3,000(at t=0)and will last for three years.  For taxpurposes, it will be depreciated using the straight line methodover a 3- year life (at t=1, 2 and 3). Theoperating expenses for this copier are \$2,200 peryear(at t=1, 2 and 3).  This copier will require\$500 of inventoryat t=0. Inventory will bedecreased to \$0 at t=3.

The GG50costs \$3,800(at t=0)and will last for four years (t=1, 2, 3, and4).  For tax purposes, it will (also) be depreciatedusing the straight line method over a 3- year life(t=1, 2 and 3). The operating expenses for this copier are\$1,800 per year(for four years). This copier willrequire \$500 of inventoryatt=0.  Inventory will be decreased to \$0 att=4.

If the appropriate discount rate is 12% and the tax rate is 40%,which copier should be selected?  Why? Be sure toquantify your answer.

Statement showing Annual equivalent cost of ZZ20

 Particulars 0 1 2 3 Total Cost of ZZ20 -3000 WC required -500 Operating expense -2200 -2200 -2200 Depreciation -1000 -1000 -1000 PBT -3200 -3200 -3200 Tax savings @ 40% 1280 1280 1280 PAT -1920 -1920 -1920 Add: depreciation 1000 1000 1000 Annual cashflow -920 -920 -920 Release of WC 500 Total cash flow -3500 -920 -920 -420 PVIF @ 12% 1.0000 0.8929 0.7972 0.7118 Present value -3500 -821 -733 -299 -5354 Divided by PVIFA(12%,3 year) 2.40 Annual Equivalent cost -2229.05

Statement showing Annual equivalent cost of GG50

 Particulars 0 1 2 3 4 Total Cost of ZZ20 -3800 WC required -500 Operating expense -1800 -1800 -1800 -1800 Depreciation -1267 -1267 -1267 0.000 PBT -3067 -3067 -3067 -1800 Tax savings @ 40% 1227 1227 1227 720 PAT -1840 -1840 -1840 -1080 Add: depreciation 1267 1267 1267 0 Annual cashflow -573 -573 -573 -1080 Release of WC 500 Total cash flow -4300 -573 -573 -573 -580 PVIF @ 12% 1.0000 0.8929 0.7972 0.7118 0.6355 Present value -4300 -512 -457 -408 -369 -6046 Divided by PVIFA(12%,3 year) 3.04 Annual Equivalent cost -1990.44

Since Annual equivalent cost of GG50 is less than ZZ20, oneshould select GG50

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