Question

You are considering purchasing a CNC machine which costs $140,000. This machine will have an estimated service life of 9 years with a net after-tax salvage value of $14,000. Its annual after-tax operating and maintenance costs are estimated to be $52,000. To expect an 16% rate of return on investment, what would be the required minimum annual after-tax revenues? Click the icon to view the interest factors for discrete compounding when i 16% per year. The required minimum annual after-tax revenues would be $ thousand. (Round to one decimal place.)

Answer 1

The minimum annual after-tax revenue should be the amount that can recover the equivalent annual cost of the CNC machine.

Initial cost = $140,000

Net after tax salvage value = $14,000

Annual after-tax operating and maintenance cost = $52,000

Useful life = 9 years

Interest rate = 16%

Calculate the equivalent annual cost -

EAC = Initial cost (A/P, i, n) + Annual after tax operating and maintenance cost + Net after tax salvage value (A/F, i, n)

EAC = $140,000(A/P, 16%, 9) + $52,000 + $14,000(A/F, 16%, 9)

EAC = [$140,000 * 0.21708] + $52,000 + [$14,000 * 0.05708]

EAC = $30391.2 + $52000 + $799.1 = $83190.3

So,

The required minimum annual after-tax revenue would be $83.2 thousand.