Scallop Corporation purchased oil exploration equipment for $600,000 that will be depreciated over 10 years using the double declining balance method. Combined state and federal tax rate is 24%. The equipment may be rented each year for $330,000, and will then be sold after 5 years for $200,000. What is the after-tax rate of return?

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A: Step 1:

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Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.