A carwash dryer is purchased for $150,000 and is expected to last ten years but

Question

A carwash dryer is purchased for $150,000 and is expected to last ten years but have no salvage value. Although it takes $15,000/year to maintain, it will generate $50,000/year revenue. Joe DePlumma, the owner, can make an 18% rate of return on his other business ventures and so that is his MARR. If Joe’s combined income tax rate is 40% and he uses straight line depreciation over ten years, state here on Blackboard the net present worth (NPW), to the closest dollar, of the dryer to Joe when the taxes are considered. Based on that NPW, state here on Blackboard whether or not Joe should invest in this dryer?

Explanation / Answer

Answer:

Blackboard the net present worth (NPW):

Life time: 10years

MARR: 18%

Initial cost: $150,000 (A/P, 18%, 10)          = $33,000

O & M costs: $15,000(P/A, 18%, 10)         = $67,500

Revenue: $50,000 (P/A, 18%, 10)              = $225,000

Tax rate: 40%     0.40(150,000)                     = $60,000                                            

Now, Blackboard the net present worth is:

                                = -33,000 – 67,500 -60,000 + 225,000

                                = -160,500 + 206,320

                                = 64,500

Therefore, the Blackboard NPW = $64,500. It indicants gain from the dryer. So Joe can invest in this dryer.

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