Question

A certain engine lathe can be purchased for ?$140,000 and depreciated over three years to a zero salvage value with the SL method. This machine will produce metal parts that will generate revenues of ?$85,000 ?(time zero? dollars) per year. It is a policy of the company that the annual revenues will be increased each year to keep pace with the general inflation? rate, which is expected to average 4?% / year ?(f equals=0.04). ?Labor, materials, and utilities totaling ?$20,000 ?(time 0? dollars) per year are all expected to increase at 8?% per year. The? firm's effective income tax rate is 55?%, and its? after-tax MARR ?(im?) is 25% per year.

Perform an? actual-dollar ?(A?$) analysis and determine the annual ATCFs of the preceding investment opportunity. Use a life of three years. What interest rate would be used for discounting? purposes?

Answer 1

	Years
	0	1	2	3
Initial Investment	-140000
Revenues ($85,000 in year 0 with 4% increase)		88400	91936	95613
Cash Expenses ($20,000 in year 0 with 8% increase)		-21600	-23328	-25194
Depreciation ($140,000 / 3)		-46667	-46667	-46667
Net operating income		20133	21941	23753
Income tax (55%)		-11073	-12068	-13064
Net income		9060	9874	10689
Add: Depreciation		46667	46667	46667
ATCF	-140000	55727	56540	57355

	Years
	0	1	2	3
ATCF	-140000	55727	56540	57355
MARR	25%	25%	25%	25%
PV factor	1	0.80	0.64	0.512
Present Value	-140000	44581	36186	29366
Net Present Value	-29867