Homework Answers
Facts of the given case : Life of the asset is 7 years, Inflation rate 3%, Risk premium is 1%, Expected rate is 10%, tax rate is 24%, salvage value is $32,000
- Nominal Pre-tax terminal value would be : $32,000
(1+0.03)^6 = $37,096
- After tax RADR is : (Normal Return + Risk Premium ) x (1 -
0.24)
i,e, (10 + 1 ) x 0.76 = 8.36% - Accumulated depreciation is calculated below
Depreciation is arrived using SLM method which is (60,000)/7 x 5 = $42,857 - Annual Tax savings on depreciation is calculated below
Depreciation charged during the year x tax rate i.e.8,571.43 x 0.24 = 2,057 per year
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