1- A $12,000 investment will return annual benefit for six years with no salvage

Question

1-

A $12,000 investment will return annual benefit for six years with no salvage value at the end of six years.  Assume straight line depreciation and a 46% tax rate and the inflation rate is 5%.  What is the inflation free after tax rate of return on the investment if the annual benefits are $2,918 in today’s dollars?

10.18%

4.94%

5%

8.20%

2-

Given the BTCF in Question #4, what is the after tax IRR if the equipment has a five year property class for MACRS depreciation?

25.92%

26.51%

10%

19.56%

10.18%

4.94%

5%

8.20%

Explanation / Answer

1)

Inflation free after tax rate of return = Annual return×(1-Tax rate)-Inflation rate

= ($2,918÷$12,000)×(1-46%)-5%

= 13.13%-5%

= 8.13%

Select nearest option (D) 8.20%

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