Question

"A corporation is considering purchasing a vertical drill machine. The machine will cost $73,000 and will have a 2-year service life. The selling price of the machine at the end of 2 years is expected to be $41,000 in today's dollars. The machine will generate annual revenues of $62,000 (today's dollars), but the company expects to have annual expenses (excluding depreciation) of $7900 (today's dollars). The asset is classified as a 7-year MACRS property. The tax rate for the firm is 38%. The general inflation rate is 7% and will impact the annual revenue, annual expenses, and salvage value. What is the real (inflation-free) rate of return for this machine? Express your answer as a percentage between 0 and 100."

Answer 1

We have considered 7% for discounting rate, hence the real rate of return is 49%