Determine company obtained expected after-tax rate of return

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Reference no: EM131883542

Problem

JET FAB bought a CNC laser cutting machine at a cost of $750,000 to meet the specific needs of customer that had given a 4-year contract with the possibility of extending the contract for another 4 years. The company uses the MACRS depreciation method for this equipment as a 7-year property for tax purposes. The income tax rate for the company is 42%, and the company expects to have an after-tax rate of return of 8% in all its investments.

The laser cutting machine generated an annual income of $250,000 for the first four years. The customer decided not to renew the contract after 4 years due to circumstances beyond its control. Consequently, the company ended up selling the CNC laser cutting machine for $220,000. Determine if the company obtained the expected after-tax rate of return on this equipment.

Reference no: EM131883542

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