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A small research device can be purchased for $10,000 and depreciated by 5-year MACRS depreciation. The net benefits from the device, before deducting depreciation, are $2500 at the end of the first year and increasing $1250 per year after that, until the device is hauled to the junkyard at the end of 10 years. During the 10-year period there will be an inflation rate f of 7%. This profitable corporation has a 28% combined federal and state income tax rate. If it requires a real 15% after-tax rate of return on its investment, should the device be purchased?

A small research device can be purchased for $10,000 and depreciated by 5-year MACRS depreciation. The net benefits from the device, before deducting depreciation, are $2500 at the end of the first year and increasing $1250 per year after that, until the device is hauled to the junkyard at the end of 10 years. During the 10-year period there will be an inflation rate f of 7%. This profitable corporation has a 28% combined federal and state income tax rate. If it requires a real 15% after-tax rate of return on its investment, should the device be purchased?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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A small research device can be purchased for $10,000 and depreciated by 5-year MACRS depreciation. The net benefits from the device, before deducting depreciation, are $2500 at the end of the first year and increasing $1250 per year after that, until the device is hauled to the junkyard at the end of 10 years. During the 10-year period there will be an inflation rate f of 7%. This profitable corporation has a 28% combined federal and state income tax rate. If it requires a real 15% after-tax rate of return on its investment, should the device be purchased?

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