Automobile Manufacturer Is Buying

An 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:

            Before-Tax

Year    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.

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