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.

Answer rating: 100% (QA)

To calculate the aftertax hourly billing rate for each option to breakeven at the Minimum Acceptable Rate of Return MARR of 15 we need to consider the cash flows associated with each option and determ... View the full answer