An industrial firm is considering purchasing several programmable controllers an

ID: 1179378 • Letter: A

Question

An industrial firm is considering purchasing several programmable controllers and

automating their manufacturing operations. It is estimated that the equipment will

initially cost $150,000 and the labor to install it will cost $45,000. A service contract

to maintain the equipment will cost $5,000 per year. Trained service personnel will

have to be hired at an annual salary of $40,000. Also estimated is an approximate

$15,000 annual income-tax savings (cash inflow). How much will this investment in

equipment and services have to increase the annual revenues after taxes in order for

the firm to break even? The equipment is estimated to have an operating life of 10

years, with no salvage value, (because of obsolescence). The firm

Let increase in revenue = x

Initial investment = 150,000 + $45,000 = $195000

for breakevn NPV =0

Yearly cashflow = x+15000-40000-5000 = x-30000

195000 = (x-30000)/1.12 + (x-30000)/1.12^2 + (x-30000)/1.12^3 .........(x-30000)/1.12^10

x= $64,511.91