A corporation has an investment opportunity that will involve a time zero $110,0

Question

A corporation has an investment opportunity that will involve a time zero $110,000 depreciable cost for machinery and equipment. It will be depreciated starting in year 1 with an additional machinery and equipment expenditure of $60,000 at the end of year 1. Use 7 year life modified ACRS depreciation for all equipment with the half year convention in the first year. Working capital investment of $30,000 is required at time zero. Income attributed to this investment is $200,000 in year 1 and $300,000 per year in years 2 and 3. Operating costs are estimated to be $150,000 the first year and $180,000 per year in years 2 and 3. The effective tax rate is 40%. It is estimated that the business developed by this investment could be sold at the end of year 3 for $250,000 (including equipment and working capital). What additional development cost could be incurred and expensed for tax purposes against other income at year 0 and still obtain a 15% DCFROR on invested dollars?

A)129,693
B)143,604
C)131,879
D) 151,047

Explanation / Answer

d.151,047

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