complete in excel The research and development division of a large corporation i
ID: 1120619 • Letter: C
Question
complete 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
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
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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