Investment in a $95,000 machine will increase a company’s revenue by $23,500 each year for 10 years. Operating expenses of the machine are $4,500 per year. The machine can be salvaged at the end of the 10 years for 10% of its cost. If the machine is depreciated as 5-year MACRS property, calculate the before-tax and after-tax rate of return on the $95,000 investment. Assume the company’s incremental federal tax rate is 35% and the incremental state tax rate is 9%. State income tax is deductible on federal taxes, but federal taxes are not deductible on state taxes.

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k Handout Basis 95,000 Combined state and federal tax rate = This is state tax % + federal % times (1- state tax %) where % is in decimal form Year Before tax flow MACRS Вook Тахable Combined taxes After-tax flow (Income - expenses) (MACRS % * initial cost) (Column C-D) (combined rate * taxable column) (Column C-G) Year 10 add salvage to income See table in column J Book value - MACRS MACRS Table -95000 95000 -95000 Year 1 20% 1 19000 19000 76000 Year 2 32% 2 Year 3 19.20% Year 4 11.52% 4 Year 5 11.52% Year 6 5.76% 6 7 8 10 Note: Taxable income in Year 10 includes revenue increase and depreciation recapture on salvage Before tax rate of return (use function IRR) = After tax rate of return (use function IRF k Handout Basis 95,000 Combined state and federal tax rate = This is state tax % + federal % times (1- state tax %) where % is in decimal form Year Before tax flow MACRS Вook Тахable Combined taxes After-tax flow (Income - expenses) (MACRS % * initial cost) (Column C-D) (combined rate * taxable column) (Column C-G) Year 10 add salvage to income See table in column J Book value - MACRS MACRS Table -95000 95000 -95000 Year 1 20% 1 19000 19000 76000 Year 2 32% 2 Year 3 19.20% Year 4 11.52% 4 Year 5 11.52% Year 6 5.76% 6 7 8 10 Note: Taxable income in Year 10 includes revenue increase and depreciation recapture on salvage Before tax rate of return (use function IRR) = After tax rate of return (use function IRF

Answer rating: 100% (QA)

Combined tax rate 009 0351009 4085 BTCF Annual revenue Annual cost Depreciation Purchase value Depre... View the full answer