A certain engine lathe can be purchased for $240,000 and depreciated over three

Question

A certain engine lathe can be purchased for $240,000 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 $160,000 (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 4% per year. Labor, materials, and utilities totaling $40,000 (time 0 dollars) per year are all expected to increase at 7% per year. The firm

Explanation / Answer

Equivalent present worth = -240000 + 103544/1.2 + 105520.4/1.2^2 + 107527.3/1.2^3= -$18,209

0 1 2 3 Initial cost -240000 Revenue 166400 173056 179978.2 Costs -42800 -45796 -49001.7 Depreciation -80000 -80000 -80000 Net incmoe 23544 25520.4 27527.32 Cash flow(net incmoe +depreciation) 103544 105520.4 107527.3 NPV ($18,208.82)

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