Question

(с) по асоса опро риоскрет 8 ACDC Company is considering the installation of a new machine that costs $150,000. The machine is expected to lead to net income of $44,000 per year for the next 5 years. Using straight-line depre- ciation, $0 salvage value, and an effective income tax rate of 40%, determine the after-tax rate of return for this investment. If the company's after- tax MARR rate is 12%, would this be a good investment or not? Contributed by Mukasa Ssemakula, Wayne State University 9 An old duplex was bought for $200,000 cash. Both

Answer 1

Solution:

ACDC Company installation of new machine is good investment.

Return on Investment = ($ 53,309 / $150,000 ) * 100 = 35.54%

Year	Cashflows	Present Value Factor@ 12%	Present Value of Cashflows
0	$      (150,000)	1	$                                    (150,000)
1	$           56,400	0.8929	$                                        50,357
2	$           56,400	0.7972	$                                        44,962
3	$           56,400	0.7118	$                                        40,144
4	$           56,400	0.6355	$                                        35,843
5	$           56,400	0.5674	$                                        32,003
			$                                        53,309

Calculation of Cashflows
Particulars	Amount $
Net Income	$           44,000
Tax @40%	$           17,600
Income After Tax	$           26,400
Depreciation ($150,000 / 5 Years)	$           30,000
Cashflows ($26,400 + $ 30,000)	$           56,400