Question

5. Houston Oil, a small oil equipment company, purchased a new petroleum drilling rig for $2,500,000. Houston Oil will depreciate it using MACRS decpreciation (petroleum drilling equipment is considered a 5-year property). The drilling rig has been leased to the ACME Corporation which will pay Houston Oil $750,000 per year for 8 years. After 8 years the drilling rig will belong to ACME Corporation. Houston Oil has a 28% combined tax rate (federal and state).

(a) Compute the (i) BTRR and (ii) the ATRR

(b) Houston Oil considers a 20% after-tax rate of return as acceptable. Is this investment acceptable?

Answer 1

Based on the annual profit for years 1, 2 and 3 for the best option, the burger type2 of existing burgers should be promoted more aggressively than the others to achieve the target profit.
As this product is showing greater profits from past years as compared to others.

Futher more of aggressive policies will help in achieving the target profits.

Activity based costing should be used by Denise as this type of costing will count costs of only the products produced.

She should buy the restaurant.

She can maximize profits by using both i.e by changing sale prices or the mix of existing sales,
She is in very good position for using any type of approach.