A machine shop that does contract work is planning to replace its 16” lathe with a new one, and needs to know what after-tax hourly billing rate each would require to breakeven at a MARR of 15%. Both are expected to run 1500 hours per year with a useful life of ten years. The company uses straight-line depreciation method to depreciate its equipment, and its income tax rate is 21%. The current lathe is fully depreciated and has no salvage value.

The two options are:

Option A: 16” manual lathe. Cost = $75,000, salvage value, year 10 = $15,000.

Option B: 16” manual lathe with coolant recovery system. Cost = $85,000, salvage value, year 10 = $20,000. The coolant recovery system is expected to save $1500 per year compared with Option A by recycling the cutting fluid.

Required:

Calculate the after-tax hourly billing rate for each option to break-even at the Minimum Acceptable Rate of Return of 15%

Also, construct both cash flow diagrams, labeling all cash inflows and outflows. Indicate the compound interest factors used ((F/A,) (P/F), etc), the interest rate and the number of periods as well as all other calculations to arrive at both hourly rates.