A manufacturer of aerospace products acquired a new multispindle, multi-turret turning center for $250,000. The machine will generate new revenue of $80,000 per year. Operating costs for the machine will average $10,000 per year. The machine will be depreciated using the MACRS method, with a recovery period of 7 years. The useful life of the turning center is 10 years; it is estimated that its salvage value will be $25,000 at this time. The company uses an after-tax MARR rate of 12% and is in the 35% tax bracket.
Now, suppose that the project duration is 5 years and that an estimate of the value of the equipment cannot be obtained from the marketplace. Suppose that the estimated SV is significantly greater than the breakeven SV – how could this potentially affect the decision regarding the profitability of the project?