A company paid $89,650 for a machine to make a new product. The machine has a...

A company paid $89,650 for a machine to make a new product. The machine has a 4 year life and a salvage value of $7,000. The company makes $30,000 per year on the new product. Assuming a 34% tax rate and straight-line depreciation, what is the before tax and after tax rates of return on the investment over its 4 year life?

Expert Solution

Cost of machine: $ 89650

Salvage value; $ 7000

Life: 4 years

Annual depreciation: Cost - Salvage value/ LIfe = (89650-7000)/4 = $20663

Net income before dep and tax: $30,000

Net Income after dep before tax: $30,000 -20663 = $ 9337

Net Income after tax: $ 9337 - 34% = $ 6163

Rate of return (before tax): Net income before tax / Initial investment *100

= $ 9337 /89650 *10 = 10.42%

Rate of return after tax: Net income after tax/ Initial Investmentt *100

= $ 6163 / 89650 *100 = 6.87%

Rahul Sunny answered 2 years ago

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