A chemical company bought a small vessel for $550,000; it is to be depreciated b

Question

A chemical company bought a small vessel for $550,000; it is to be depreciated by MACRS depreciation. When requirements changed suddenly, the chemical company leased the vessel to an oil company for 6 years at $100,000 per year. The lease also provided that the oil company could buy the vessel at the end of 6 years for $350,000. At the end of the 6 years, the oil company exercised its option and bought the vessel. The chemical company has a 34% combined incremental tax rate. Compute its after-tax rate of return on the vessel.

Explanation / Answer

Average profit = (100000*6 + 350000 - 550000)*(1 - .34) / 6

= 44000

After tax return = 44000 / 550000

= 8%

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