A certain engine lathe can be purchased for $120,000 and depreciated over three

Question

A certain engine lathe can be purchased for $120,000 and depreciated over three years to a zero salvage value with the SL method. This machine will produce metal parts that will generate revenues of $80,000 (time zero dollars) per year. It is a policy of the company that the annual revenues will be increased each year to keep pace with the general inflation rate, which is expected to average 2% per year. Labor, materials, and utilities totaling $20,000 (time 0 dollars) per year are all expected to increase at 3% per year. The firm

Explanation / Answer

Depreciation = 120000/3=40000

after-tax equivalent present worth = -120000 + 49450/1.12 + 49906.3/1.12^2 + 50368.95/1.12^3= -212

0 1 2 3 Initial cost -120000 Revenue 81600 83232 84896.64 Costs -20600 -21218 -21854.5 Depreciation -40000 -40000 -40000 Net income 9450 9906.3 10368.95 Cash flow 49450 49906.3 50368.95

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