Suppose you have to decide whether selling an old machine or keeping it with a major overhaul: A) Selling the machine at time zero for $400,000 with zero book value and paying the tax of 40%.

B) Keeping the machine, which requires a major overhaul cost of $1.000,000 at time zero. The overhaul cost is depreciable from time 1 to year 6 (over six years) based on MACRS 7-year life depreciation with the half year convention (table A-1 at IRS). In this case machine can produce and generate equal annual revenue for six years (year 1 to 6) and salvage value of the machine will be $200,000 with zero book value at the end of year 6. The operating cost will be 580,000 per year from year 1 to year 6.

Calculate the minimum annual revenue that machine has to generate to break-even the selling with NPV of keeping the machine. Consider 40% income tax rate and after tax minimum ROR of 8%.

Answer rating: 100% (QA)

A NPV in case 1 Year 0 Sale 400000 Less Book value 0 Profit on sale of assets 4... View the full answer