A division of a large corporation is considering the purchase of a new tunneling
ID: 2765525 • Letter: A
Question
A division of a large corporation is considering the purchase of a new tunneling X-ray microscope for $370,125. The projected net benefits from gains in materials engineering is projected to be $125,000 in today’s real dollars for the first year, increasing by an arithmetic gradient of $18,500 per year in real dollars for years 2 to 4. The unit will be depreciated under MACRS. Due to increasing advances in tunneling X-ray microscope technology, the unit will have $50,000 market value in today’s real dollars at the end of the 4 year project life. During the 4 year analysis period, inflation is expected to be steady at 3.8% per year. The corporation has a combined state and federal income tax rate of 40.0%. The corporation requires a 15.0% after-tax market rate of return on its research and development investments. Should the X-ray unit be purchased?
A division of a large corporation is considering the purchase of a new tunneling X-ray microscope for $370,125. The projected net benefits from gains in materials engineering is projected to be $125,000 in today’s real dollars for the first year, increasing by an arithmetic gradient of $18,500 per year in real dollars for years 2 to 4. The unit will be depreciated under MACRS. Due to increasing advances in tunneling X-ray microscope technology, the unit will have $50,000 market value in today’s real dollars at the end of the 4 year project life. During the 4 year analysis period, inflation is expected to be steady at 3.8% per year. The corporation has a combined state and federal income tax rate of 40.0%. The corporation requires a 15.0% after-tax market rate of return on its research and development investments. Should the X-ray unit be purchased?
Explanation / Answer
(1+Real Required Return) = (1+.15)/(1.038) =10.79%
Year Beg. Bal. Rate Depreciation Tax Saving Real Saving 1 370125 33.33 $123,362.66 $49,345.07 $47,538.60 2 246762.3 44.45 $109,685.86 $43,874.34 $40,720.76 3 137076.5 14.81 $20,301.03 $8,120.41 $7,260.82 4 116775.5 7.41 $8,653.06 $3,461.22 $2,981.54Related Questions
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