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12- (a) The BVM Corp., a construction company, purchased a used hybrid electric pickup truck for $30,000 and used MACRS depreciation in the income tax return. During the time the company had the truck, they estimated that it saved $9500 a year. At the end of 4 years, BVM sold the truck for $9000. The combined federal and state income tax rate for BVM is 28%. Compute the after-tax rate of return for the truck. ១៩ ធ

12- (a) The BVM Corp., a construction company, purchased a used hybrid electric pickup truck for $30,000 and used MACRS depreciation in the income tax return. During the time the company had the truck, they estimated that it saved $9500 a year. At the end of 4 years, BVM sold the truck for $9000. The combined federal and state income tax rate for BVM is 28%. Compute the after-tax rate of return for the truck. ១៩ ធ

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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**Example Problem for Educational Purposes** The BVM Corp., a construction company, purchased a used hybrid electric pickup truck for $30,000 and used MACRS depreciation in the income tax return. During the time the company had the truck, they estimated that it saved $9500 a year. At the end of 4 years, BVM sold the truck for $9000. The combined federal and state income tax rate for BVM is 28%. Compute the after-tax rate of return for the truck. *Notes:* - **MACRS Depreciation:** The Modified Accelerated Cost Recovery System (MACRS) is a method of depreciation in the United States allowing the capitalized cost of an asset to be recovered over a specified life through annual deductions. - **After-Tax Rate of Return:** The return on an investment after all taxes on it have been accounted for. *Detailed Steps to Solve:* 1. **Depreciation Calculation:** Determine the annual depreciation using the MACRS table applicable for the type of asset. (Refer to standard MACRS tables and guidelines online or in educational materials). 2. **Cash Flow Analysis:** Evaluate the annual cash flow taking into consideration the savings, expenses, and depreciation. 3. **Tax Impact:** Adjust for taxes using the given tax rate (28%) to find the after-tax cash flow. 4. **Final Sale:** Incorporate the sale of the truck at $9,000 at the end of 4 years into the cash flow analysis. 5. **Rate of Return Computation:** Use financial formulas, such as the Internal Rate of Return (IRR), to determine the after-tax rate of return. By applying these steps and utilizing financial formulas, BVM Corp. can effectively calculate the after-tax rate of return on their investment in the hybrid electric truck.
Transcribed Image Text:**Example Problem for Educational Purposes** The BVM Corp., a construction company, purchased a used hybrid electric pickup truck for $30,000 and used MACRS depreciation in the income tax return. During the time the company had the truck, they estimated that it saved $9500 a year. At the end of 4 years, BVM sold the truck for $9000. The combined federal and state income tax rate for BVM is 28%. Compute the after-tax rate of return for the truck. *Notes:* - **MACRS Depreciation:** The Modified Accelerated Cost Recovery System (MACRS) is a method of depreciation in the United States allowing the capitalized cost of an asset to be recovered over a specified life through annual deductions. - **After-Tax Rate of Return:** The return on an investment after all taxes on it have been accounted for. *Detailed Steps to Solve:* 1. **Depreciation Calculation:** Determine the annual depreciation using the MACRS table applicable for the type of asset. (Refer to standard MACRS tables and guidelines online or in educational materials). 2. **Cash Flow Analysis:** Evaluate the annual cash flow taking into consideration the savings, expenses, and depreciation. 3. **Tax Impact:** Adjust for taxes using the given tax rate (28%) to find the after-tax cash flow. 4. **Final Sale:** Incorporate the sale of the truck at $9,000 at the end of 4 years into the cash flow analysis. 5. **Rate of Return Computation:** Use financial formulas, such as the Internal Rate of Return (IRR), to determine the after-tax rate of return. By applying these steps and utilizing financial formulas, BVM Corp. can effectively calculate the after-tax rate of return on their investment in the hybrid electric truck.
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