A company is considering the purchase of a capital asset for $120,000. Installation charges needed to make
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Question:
Installation charges needed to make the asset serviceable will total $25,000. The asset will be depreciated over six years using the straight-line method and an estimated salvage value (SV6) of $22,000. The asset will be kept in service for six years, after which it will be sold for $27,000. During its useful life, it is estimated that the asset will produce annual revenues of
$25,000. Operating and maintenance (O&M) costs are estimated to be
$5,000 in the first year. These O&M costs are projected to increase by
$500 per year each year thereafter. The after-tax MARR is 15% and the effective tax rate is 25%.
a. Compute the after-tax cash flows.
b. Compute the after-tax present worth of the project, and use a uniform gradient in your formulation.
c. The before-tax present worth of this asset is −$72,738. By how much would the annual revenues have to increase to make the purchase of this asset justifiable on a before-tax basis?
Related Book For
Cost management a strategic approach
ISBN: 978-0073526942
5th edition
Authors: Edward J. Blocher, David E. Stout, Gary Cokins
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