7-22. 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%.

(7.9)

a. Use the tabular format given in Figure 7-5 to compute the after-tax cash flows.

b. Compute the after-tax present worth of the project, and use a uniform gradient in your formulation.

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?