A manager has to decide to sell an old machine or keep it with a major overhaul.
To sell: The machine can be sold at time zero for X dollars with zero book value. The selling value is taxable at the rate of 35%.
To keep: Keeping the machine requires a major overhaul cost of $400,000 at time zero. The overhaul cost is depreciable from time 0 to year 5 (over six years) based on MACRS 5-year life depreciation with the half year convention (table A-1 at IRS). In this case machine can produce and generate equal annual revenue of 300,000 dollars for five years (year 1 to 5) and salvage value of the machine will be $200,000 with zero book value at the end of year 5. The operating cost of the machine will be $120,000 per year from year 1 to year 5.
Calculate the sale value, X, that can break-even the NPV of keeping the machine. Consider 35% income tax rate and after-tax minimum ROR of 12%.