A certain engine lathe can be purchased for $210,000 and depreciated over three

Question

A certain engine lathe can be purchased for $210,000 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 $140,000 (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 3.5% per year. Labor, materials, and utilities totaling $35,000 (time 0 dollars) per year are all expected to increase at 6% per year. The firm

Explanation / Answer

Net present value of the cash flows =   

( 89656/1.18 +91135.66/1.18^2 + 92638.17/1.18^3) - 210000

Hence, the after tax equivalent present worth of the investment is -$12,185.68

Year 1 Year 2 Year 3 Revenues generated from the sale of parts produced by the machine @ 3.5% annual growth 144900 149971.5 155220.5 Costs@ 6% increase 37100 39326 41685.56 Depriciation = (210,000/3) 70000 70000 70000 Net earnings @ 48% tax 19656 21135.66 22638.17 Cash flow = net earnings + depriciation 89656 91135.66 92638.17

Net present value of the cash flows =   

( 89656/1.18 +91135.66/1.18^2 + 92638.17/1.18^3) - 210000

$. -12,185.68

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