Question

A machine costs $900,000 and requires $50,000 maintenance for each year of its three-year life. the maintenance costs are paid at the end of each year. after 3 years, the machine will be replaced. assume a tax rate of 34% and a discount rate of 14%. if the machine is depreciated over three years using the straight-line method, with no salvage value, what is the equivalent annual annuity?

Answer 1

Depreciation = $900,000/3 = $300,000

Particulars	Amount
Expenses	$                 50,000
Add: depreciation	$              300,000
Total expenses	$              350,000
Tax savings @34%	$              119,000
Less: cash expenses	$               (50,000)
Net cash inflow	$                 69,000
× PVAF	2.32163
Present value of inflows	$         160,192.61
Investment	$         900,000.00
Less: present value of inflow	$       (160,192.61)
Net cost	$         739,807.39
divided by annuity factor	2.32163
Equivalent annual cost	$         318,658.33

Equivalent annual cost is $318,658.33