Hudson Corporation needs a machine that costs $60 000 and is expected to run for 5 years. Hudson

QUESTION

Hudson Corporation needs a machine that costs $60,000 and is expected to run for 5 years. Hudson will depreciate it completely in 4 years on a straight-line basis. The tax rate of the company is 33%, and the proper discount rate is 13%. Find the minimum annual earnings before taxes that this machine should have to justify its purchase.
Let us assume that minimum annual earnings before taxes and depreciation = E Annual Depreciation = $60,000 / 5 = $12,000 Tax rate = 33% Annual earnings before taxes = (E + $12,000) * 0.67 + $12,000 Discount rate = 13% PVIFA at 13% for 5 years = 3.517 Minimum annual earnings before taxes to justify purchase

f machine is such that the NPV is at least zero or more Hence, [(E + $12,000) * 0.67 + $12,000] * 3.517 $60,000= 0 Or, E = (-) 4,448 Or, Minimum annual earnings before taxes = (-) 4,448 + $12,000 = $7,552

ANSWER:

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