A company is considering the purchase of a capital asset for $135,000. Installation charges needed to make the asset serviceable will total $25,000. The asset will be depreciated over six years using the straight-line method and an estimated salvage value (SV6) of $10,000. The asset will be kept in service for six years, after which it will be sold for $ 30,000. During its useful life, it is estimated that the asset will produce annual revenues of $40,000. Operating and maintenance (O&M) costs are estimated to be $8,000 in the first year. These O&M costs are projected to increase by $ 1,200 per year each year thereafter. The after-tax MARR is 12% and the effective tax rate is 40 % .C) The before - tax present worth of this asset is -$60,000. By how much would the annual revenues have to increase to make the purchase of this asset justifiable on a before - tax basis?

A company is considering the purchase of a capital asset for $135,000. Installation charges needed to make the asset serviceable will total $25,000. The asset will be depreciated over six years using the straight-line method and an estimated salvage value (SV6) of $10,000. The asset will be kept in service for six years, after which it will be sold for $ 30,000. During its useful life, it is estimated that the asset will produce annual revenues of $40,000. Operating and maintenance (O&M) costs are estimated to be $8,000 in the first year. These O&M costs are projected to increase by $ 1,200 per year each year thereafter. The after-tax MARR is 12% and the effective tax rate is 40 % .C) The before - tax present worth of this asset is -$60,000. By how much would the annual revenues have to increase to make the purchase of this asset justifiable on a before - tax basis?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Question

A company is considering the purchase of a capital asset for $135,000. Installation charges needed to make the asset
serviceable will total $25,000. The asset will be depreciated over six years using the straight-line method and an
estimated salvage value (SV6) of $10,000. The asset will be kept in service for six years, after which it will be sold for $
30,000. During its useful life, it is estimated that the asset will produce annual revenues of $40,000. Operating and
maintenance (O&M) costs are estimated to be $8,000 in the first year. These O&M costs are projected to increase by $
1,200 per year each year thereafter. The after-tax MARR is 12% and the effective tax rate is 40 % .C) The before - tax
present worth of this asset is -$60,000. By how much would the annual revenues have to increase to make the purchase
of this asset justifiable on a before - tax basis?

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