Work the problem in Excel The research and development division of a large corpo

Question

Work the problem in Excel

The research and development division of a large corporation is considering the purchase of a new tunneling X-ray microscope for $320,125. The projected net benefits from gains in materials engineering is projected to be $127,000 in today’s real dollars for the first year, increasing by an arithmetic gradient of $20,000 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 $60,000 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 20.0% after-tax market rate of return on its research and development investments. Should the X-ray unit be purchased?

Explanation / Answer

X Ray unit should be as corporation would be able to get 20% after tax market return on its investments

Workings as per below.

Income in Real dollars Inflation in next 4 years Income post Inflation Depreciation Actual Income Income post TAX Investment ROI 127000 100.0 127,000.00 $43,354 83646 50,187.60 $320,125 64025 147000 103.8 141,618.50 $86,708 54910.49711 32,946.30 256100 51220 167000 107.7 154,996.45 $86,708 68288.45457 40,973.07 204880 40976 187000 111.8 167,205.11 $43,354 123851.11 74,310.67 163904 32780.8 198,417.64 189,001.80

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