A certain engine lathe can be purchased for $150,000 and depreciated over three years to a zero salvage value with the SL method. This machine willproduce 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 5%/year ( f = 0.05). Labor, materials, and utilities totaling $20,000 (time 0 dollars) per year are all expected to increase at 9% per year. The firm’s effective income tax rate is 50%, and its after-tax MARR (im) is 26% per year. Perform an actual-dollar (A$) analysis and determinethe annual ATCFs of the preceding investment opportunity. Use a life of three years and work to the nearest dollar. What interest rate would be used for discounting purposes?
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
A certain engine lathe can be purchased for $150,000 and
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 5%/year ( f = 0.05). Labor, materials, and utilities totaling $20,000 (time 0 dollars) per year are all expected to increase at 9% per year. The firm’s effective income tax rate is 50%, and its after-tax MARR (im) is 26% per year. Perform an actual-dollar (A$) analysis and determine
the annual ATCFs of the preceding investment opportunity. Use a life of three years and work to the nearest dollar. What interest rate would be used for discounting purposes?
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