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

Machine Cost = 140,000

Life = 9 years

After tax salvage value = 14,000

After tax operating and maintenance cost = 52,000 per year

Expected rate of return = 16%

What would be the minimum annual after tax revenues?

Calculate the Present Worth of the above cash flows.

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

PW = 140,000 + 52,000 (4.6065) – 14,000 (0.2630) = 375,856

The annual revenue required to recover this cost is

A = P (A/P, 16%, 9)

A = 375,856 (0.2171)

A = 81,598

The required minimum annual after tax revenues would be $81,598