Lymbo Company, Inc. must install safety devices throughout its plant or it will lose its insurance coverage. Two alternatives are acceptable to the insurer. The first costs $100,000 to install and $20,000 to maintain, annually. The second costs $150,000 to install and $10,000 to maintain annually. Each has a 5-year income tax life and a 15-year useful life. Lymbo’s is 12%, its marginal tax rate is 30%, and it uses straight-line amortization (ignore the half-year convention).
REQUIRED
A. Which system should be installed? Why?
B. If Lymbo were a not-for-profit organization that does not pay income taxes on its operations, which system would be installed?
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