3. JET FAB bought a CNC laser-cutting machine at a cost of S400,000 to meet the

Question

3. JET FAB bought a CNC laser-cutting machine at a cost of S400,000 to meet the specific needs of customer that had given a 4-year contract with the possibility of extending the contract for another 4 years. The company uses the MACRS depreciation method for this equipment as a 7- year property for tax purposes. The income tax rate for the company is 39%, and the company expects to have an after-tax rate of return of 10% in all its investments. The laser-cutting machine generated an annual income of $80,000 for the first four years. The customer decided not to renew the contract after 4 years due to circumstances beyond its control. Consequently, the company ended up selling the CNC laser-cutting machine for $150,000. Determine if the company obtained the expected after-tax rate of return on this equipment.

Explanation / Answer

Due to negative NPV entity should not make investment.

Working:

Years 1 2 3 4 Total Annual income 80000 80000 80000 80000 Less: Depreciation 50015 85715 61215 43715 Income before tax 29985 -5715 18785 36285 Less: Tax @39% 11694 0 7326 14151 Income after tax 18291 -5715 11459 22134 Add: Depreciation 50015 85715 61215 43715 Cash flow 68306 80000 72674 65849 Discount factor (10%) 0.909 0.826 0.751 0.683 Present value 62096.23 66115.7 54600.94 44975.65 227789 Present value of salvage 150000*.683 102450 Less: Initial investment -400000 Net present value -69761

Related Questions

Navigate

• Browse (All)
• Browse 3
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.