An automobile manufacturer is buying some special tools for $100,000. The tools are being depreciated by double declining balance depreciation using a 4-year depreciable life and a $6250 salvage value. It is expected the tools will actually be kept in service for 6 years and then sold for $6250. The before-tax benefit of owning the tools is as follows:
Year Before-Tax Cash Flow
1...............................................$30,000
2................................................30,000
3................................................35,000
4................................................40,000
5................................................10,000
6................................................10,000
....................................6,250 selling price
Compute the after-tax rate of return for this investment situation, assuming a 46% incremental tax rate. (Answer: 11.6%)