A small vessel was purchased by a chemical company for $55,000 and is to be depr

Question

A small vessel was purchased by a chemical company for $55,000 and is to be depreciated by MACRS depreciation. When its requirements changed suddenly, the chemical company leased the vessel to an oil company for 6 years at $10,000 per year. The lease also provided that the vessel could be purchased at the end of 6 years by the oil company for $35,000. At the end of the 6 years, the oil company exercised its option and bought the vessel. The chemical company has a 34% incremental tax rate. Compute its after-tax rate of return on the vessel.

Explanation / Answer

A small vessel was purchased by a chemical company for $55,000 and is to be depreciated by MACRS depreciation. When its requirements changed suddenly, the chemical company leased the vessel to an oil company for 6 years at $10,000 per year. The lease also provided that the vessel could be purchased at the end of 6 years by the oil company for $35,000. At the end of the 6 years, the oil company exercise its option and bought the vessel. The chemical company has a 34% incremental tax rate. Compute its after-tax rate of return on the vessel.

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