The Shellout Corp. owns a piece of petroleum drilling equipment that costs $100,
ID: 1206201 • Letter: T
Question
The Shellout Corp. owns a piece of petroleum drilling equipment that costs $100,000 and will be depreciated over 10 years by double declining balance depreciation. There is a combined 40% tax rate. Shellout will lease the equipment to others and each year receive $30,000 in rent. At the end of 5 years, the firm will sell the equipment for $35,000. What is the after-tax rate of return Shellout will receive from this equipment investment?
Please solve this question by hand. NO Microsoft Excel functions, only a table may be used. Show correct formulas used to solve this question. Please show all work leading up to the correct answer for this question. Do not copy from another person's work!
Explanation / Answer
Depreciation Calculation for 5 Years Year Opening NBV Depreciation 1 100000 20000 2 80000 16000 3 64000 12800 4 51200 10240 5 40960 5960 Year Rent (A) Depreciation (B) Tax (C-B)*40% After Tax Return After Tax Rate of Return 1 30000 20000 4000 6000 6% 2 30000 16000 5600 8400 8% 3 30000 12800 6880 10320 10% 4 30000 10240 7904 11856 12% 5 30000 5960 9616 14424 14%
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