Question

A concrete fabricating machine was purchased 12 years ago for $75,000 with an estimated life of 15 years and $15,000 salvage. Straight-line depreciation has been used. This machine produces parts at the rate of 3.54 hours per 100 parts, and has an efficiency rating of 78%. The machine requires 3 operators paid a wage rate of $14.76 per hour. The machine is run on one shift only (eight hours per day is regular time), with overtime scheduled as necessary. Demand for these parts averages 50,000 parts per year. Overtime pay is 50% greater than the base rate. Labor costs are increasing at 5.3% per year. The parts sold last year for $2.70 per part. Future price increases are expected to average 6.5% per year. Maintenance last year was $4500. The machine can be kept running but maintenance will increase by 12% per year. The current market value for this machine is $28,000. Tax rates are 40% on ordinary income and 20% on capital gains income. Inflation is expected to be 4.2%, 4.8% and 5.2% for the next 3 years.

a. How much would be realized for the machine after taxes if it was sold today?

b. What is the next year labor expense? (Year 13)

c. Complete the following table. Assume the machine is sold in 3 years for $5000. Calculate the inflation-adjusted rate of return (io) assuming the machine is kept and sold in 3 years (at the end of year 15).

Year	Revenue	Labor	Maintenance	BTCF	Depreciation	Tax Inc	Tax	ATCF
								Apparent	Real

0

13

14

15

Please show your work with the explanation

Answer 1