Question

You are considering purchasing a CNC machine which costs $150,000. This machine will have an estimated service life of 12 years with a net after-tax salvage value of $15,000. Its annual after-tax operating and maintenance costs are estimated to be $54,000. To expect an 16% rate of return on investment, what would be the required minimum annual after-tax revenues? 5 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 $ 82376 thousand. (Round to one decimal place.)

Answer 1

Step 1: Calculate the Present Value of Cost @ 16%:

Calculation of PV Factor = 1/(1+r)^t

r = 16%

t= Year

Year	Outflow/ (Inflow)	PV Factor @ 16%	Present Value of Outflow/ (Inflow)
0	150000	1.00	150000.00
1	54000	0.8621	46551.72
2	54000	0.7432	40130.80
3	54000	0.6407	34595.51
4	54000	0.5523	29823.72
5	54000	0.4761	25710.10
6	54000	0.4104	22163.88
7	54000	0.3538	19106.79
8	54000	0.3050	16471.37
9	54000	0.2630	14199.46
10	54000	0.2267	12240.91
11	54000	0.1954	10552.51
12	54000	0.1685	9096.99
12	-15000	0.1685	-2526.94
		Total	428116.85

Present Value of Outflow /(Inflow): 428116.85

Step 2: Cumulative Present Value Factor for 12 Years @ 16%:

Sum of PV factor from year 1 to 12 Years as given above =5.1917

Step 3: Calculation of required minimum revenue per annum:

Required revenue per annum= NPV of Cash outflow/ Cumulative PV factor for 12 years @ 16%

= 428116.85/5.1917

Required minimum annual after tax revenue =82375.99 or say $ 82376