Machine #2356 is 4 years old. When purchased it cost $65,000. Straight line depr

Question

Machine #2356 is 4 years old. When purchased it cost $65,000. Straight line depretiation with zero salvage and a 5 year life has been used. This machine has a cash operating costs of $47500 per year. It is now thought that this machine will last another 4 years with a $20,00 salvage in 4 years. Current market value is $3200 The taxes are 45% ordinary income and 20% on capital gain income. If the machine is kept, what will the annual equivalent revenues need to be for MARR is 15%?

The correct answer should be 55,000. I keep geting 49,000 as my final answer.

Explanation / Answer

Book value of machine = 65000-(65000/5*4 ) = 65000-52000 = 13000

Let annual equivalent revenues be X.

As per equation,

Outflow = Inflow

(X-47500)*(1-0.45) *Present value annuity factor(15%,4) + 2000*Present value interest factor(15%,4) = 13000

(0.55X - 26125)*2.8549 + 2000*0.5717 = 13000

1.571X - 74584.26 + 1143.40 = 13000

1.571X = 86440.86

X = 86440.86/1.571 = 55022.82

i.e. 55000

So, equivalent annual revenues is $55000.

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