An investment plan includes a purchasing at the beginning of the year. A piece o

Question

An investment plan includes a purchasing at the beginning of the year. A piece of machinery costing $134, which will be fully depreciated in the next yea, and then salvaged with zero value. The profits for this year are estimated to be $162, and the combined tax rate is 14%. The real interest rate is unknown, but assumed nonnegative. What is the smallest inflation rate at which the overall investment is unprofitable (regardless of real interest)? ( Provide your answer as a number, not a percentage, with 0.01 precision.

Explanation / Answer

Total Investment = $134

Total income in year = 162

Tax rate = 14%

Income after tax = $162 × (1 – 14%)

                           = $139.32

Total return from Investment = ($139.32 - $134) / $134

                                                = $5.32 / $134

                                                = 3.97%

Total return from investment = 3.97%

Real interest rate = nonnegative let’s say 0%

So inflation rate = 0.0397 – 0.00

                           = 0.0397

Hence, Inflation rate is 0.0397.

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