A corporation with $7M in federal annual taxable income is considering the purch

Question

A corporation with $7M in federal annual taxable income is considering the purchase of a robot spray-painting machine that costs $10,000. It will save $6,485 per year, but will require $2,100 per year in maintenance expenses. It will have no salvage value. Assuming the machine has a useful life of 10 years and is depreciated using SL (Straight Line) depreciation over 10 years, what would be the machine's after-tax rate-of-rectum? (Since no state or local tax rates are specified, assume they are zero. Use only Federal Income tax.)

Explanation / Answer

The applicable tax rate for this company as per federal tax will be 34%.

Depreciation = $10,000/10 =$1,000/Year

Savings

$6,485.00

Less: Expense

$2,100.00

Less: Depreciation

$1,000.00

Before tax savings

$3,385.00

Less: Tax @ 34%

$1,150.90

After-tax Savings

$2,234.10

Add: Depreciation

$1,000.00

Operating Cash Flow

$3,234.10

After-tax rate of return = $3,234.10/$10,000 = 32.3410%

Savings

$6,485.00

Less: Expense

$2,100.00

Less: Depreciation

$1,000.00

Before tax savings

$3,385.00

Less: Tax @ 34%

$1,150.90

After-tax Savings

$2,234.10

Add: Depreciation

$1,000.00

Operating Cash Flow

$3,234.10

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