Suppose you have to decide whether selling an old machine or keeping it with a major overhaul:
A) Selling the machine at time zero for $400,000 with zero book value and paying the tax of 40%.
B) Keeping the machine, which requires a major overhaul cost of $1,000,000 at time zero. The overhaul cost is depreciable from time 1 to year 6 (over six years) based on MACRS 7-year life depreciation with the half year convention (table A-1 at IRS).
In this case machine can produce and generate equal annual revenue for six years (year 1 to 6) and salvage value of the machine will be $200,000 with zero book value at the end of year 6. The operating cost will be $80,000 per year from year 1 to year 6.
Calculate the minimum annual revenue that machine has to generate to break-even the selling with NPV of keeping the machine. Consider 40% income tax rate and after-tax minimum ROR of 8%.