Question

It is proposed to purchase a machine to be used for rental purposes. The first cost is $40,000. For the first year of ownership, $8,400 is estimated as the excess of receipts over disbursements for everything except income taxes. Considering declining rental receipts with age and increased upkeep costs, it is believed that this figure will decline by $500 each year and will be $7,900 I the second year, $7,400 in the third and so on. It is estimated the machine will be retired after 15 years with a $4,000 salvage value. Estimated disbursements for income taxes are $2,400 the first year, $2,200 the second and will decrease by $200 each year thereafter. What is the prospective after tax rate of return?

Answer 1

First cost = $40,000

Receipt in 1st year= $8,400

With a decreasing amount of $500/ year

So, return for 15 years will form an AP

8400,7900,7400...…...…..15 terms

a=8400

d=-500

n=15

Sum= 15/2[2*8400+14*(-500)]

Sum= 15/2[16,800-7000]

Sum= 15/2*9,800

Sum= $73,500

Tax will also form an AP

$2400,2200,......15 TERMS

a=2400

d= -200

n= 15

Sum= 15/2[2*2400+14*(-200)]

Sum= 15/2[4800-2800]

Sum= $15,000 ( Total tax spendings)

Hence net revenue= $73,500-$15,000

Net revenue= $58,500

So, net return= net Revenue- net cost

Return= $58,500-$40,000

Return= $28,500

Rate of Return=( 28,500/40,000)*100

Rate of Return= 71.25% for 15 years

Average ROR (annual) = 4.75%/annun