Accounting for Decision Making and Control 6th Edition by Jerold Zimmerman

Exercise 36

Two types of machine tools are available for performing a particular job in Apex Corporation. Tool A has an initial investment of $52,000, with operating costs of $26,000 per year, an economic service life of 12 years, and a salvage value of $6,000 at the end of that period. Tool B has an initial investment of $41,000, with operating costs of $32,000 per year, an economic service life of 12 years, and a salvage value of $4,500 at the end of that period. The tax rate is 40 percent, the depreciation method is sum of the years' digits, and the tax life for depreciation equals the economic service life.
Required:
a. Assuming the cost of capital is 8 percent, which tool should be purchased
b. How would your answer to (a) change if double-declining-balance depreciation were used (You may assume that you are allowed to switch to straight-line depreciation at any point during the asset's life.)