A restaurant is considering buying a new coffee making machine, which will be replaced over and over with a new one when an old one dies. Each coffee making machine costs $143,000, and is expected to die after exactly 6-years. Each machine will costs $10,200 per year to operate. The discount rate that the restaurant assigns to this coffee making machine project is 11 percent per year. The straight-line depreciation method would be used when calculating the machine's loss of value for tax purposes. Each coffee making machine will be fully depreciated all the way to zero at the end of its life. Also, each coffee making machine will have a before-tax salvage value of $10,500 at the end of its life. The restaurant's tax rate is 25 percent. As always, assume that all cash flows occur at year end. If the restaurant buys a coffee making machine over and over in perpetuity, as soon as one dies, what would be the average, or the equivalent, annual cost (EAC) of the machine?

Coffee Making Restaurant

If the restaurant buys a coffee making machine in perpetuity, the equivalent annual cost (EAC) of the machine will be:

Equivalent annual cost of the machine = $44,994

Explanation:

a) Data and Calculations:

Initial investment cost of machine = $143,000

Expected useful life = 6 years

Discount rate = 11%

Annual operating cost = $10,200

Before-tax salvage value = $10,500

Applicable tax rate = 25%

After-tax salvage value = $7,875

Annuity factor for 6 years at 11% = 4.231

Present value of costs:

Initial investment =          $143,000 ($143,000 * 1)

Annual operating cost =      43,156 ($10,200 * 4.231)

Salvage value =                     (4,213) ($7,875 * 0.535)

Total costs =                    $190,369

Equivalent annual cost of the machine = $44,994 ($190,369/4.231)

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"we first find value of tax in dollars.

the difference between the two prices   is: 23. 54 - 22 = 1.54

therefore the sales tax in dollars is 1.54

the tax % will be   (amount of tax / original cost price ) × 100

(1.54 / 22) × 100  → (0.07) × 100 =   7

so the tax rate is 7%

we can double check the answer.

7 % of 22   → (7/100) × 22 → 0.07 × 22 = 1.54

22 + 1.54 = 23.54"