JET FAB bought a CNC laser cutting machine at a cost of $400,000 to meet the spe

Question

JET FAB bought a CNC laser cutting machine at a cost of $400,000 to meet the specific needs of customer that had given a 4-year contract with the possibility of extending the contract for another 4 years. The company uses the MACRS depreciation method for this equipment as a 7-year property for tax purposes. The income tax rate for the company is 39%, and the company expects to have an after -tax rate of return of 10% in all its investments. The laser cutting machine generated an annual income of $80,000 for the first four years. The customer decided not to renew the contract after 4 years due to circumstances beyond its control. Consequently, the company ended up selling the CNC laser cutting machine for $150,000. Determine if the company obtained the expected after-tax rate of return on this equipment.

Explanation / Answer

Step 1:

Step 2

Since the net present value of the project is negative the machine should not be sell at the 4 year and should renew the contract further more

Particulars Amount yr1 2 3 4 Sales 80000 80000 80000 80000 Depreciation 57160 97960 69960 49960 7 years MACRS Net income 22840 -17960 10040 30040 Tax @39% 8907.6 -7004.4 3915.6 11715.6 Profit after tax 13932.4 -10955.6 6124.4 18324.4 Net cash flow = profit + dep 71092.4 87004.4 76084.4 68284.4

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