Bob Jensen Incorporated purchased a $660,000 machine to manufacture specialty taps for electrical equipment. Jensen expects to sell all it can manufacture in the next 10 years. To encourage capital investments, the government has exempted taxes on profits from new investments. This legislation is to be in effect for the foreseeable future. The machine is expected to have a 10-year useful life with no salvage value. Jensen uses straight-line depreciation. Jensen uses a 10% discount rate in evaluating capital investments, the investment is subject to taxes, and the projected pretax operating cash inflows are as follows: Year Pretax Cash Inflow 1 $ 66,000 2 81,000 3 122,000 4 203,000 5 244,000 6 305,000 7 275,000 8 244,000 9 122,000 10 81,000 Jensen has been paying 25% for combined federal, state, and local income taxes, a rate that is not expected to change during the period of this investment. The firm uses straight-line depreciation. Assume, for simplicity, that MACRS depreciation rules do not apply. Compute the following for the proposed investment: The accounting (book) rate of return based on (a) initial investment, and (b) average investment. Round your final answers to 1 decimal place (i.e. 0.123 = 12.3%).
Bob Jensen Incorporated purchased a $660,000 machine to manufacture specialty taps for electrical equipment. Jensen expects to sell all it can manufacture in the next 10 years. To encourage capital investments, the government has exempted taxes on profits from new investments. This legislation is to be in effect for the foreseeable future. The machine is expected to have a 10-year useful life with no salvage value. Jensen uses straight-line
| Year | Pretax |
|---|---|
| 1 | $ 66,000 |
| 2 | 81,000 |
| 3 | 122,000 |
| 4 | 203,000 |
| 5 | 244,000 |
| 6 | 305,000 |
| 7 | 275,000 |
| 8 | 244,000 |
| 9 | 122,000 |
| 10 | 81,000 |
Jensen has been paying 25% for combined federal, state, and local income taxes, a rate that is not expected to change during the period of this investment. The firm uses straight-line depreciation. Assume, for simplicity, that MACRS depreciation rules do not apply.
Compute the following for the proposed investment:
The accounting (book)
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