Reference no: EM132983580

Question - A production equipment at a cost of $500,000 has been purchased by a contract manufacturing company to meet the specific needs of customer that had awarded a 4-year contract with the possibility of extending the contract for another 4 years. The company plans to use the MACRS depreciation method for this equipment as a 7-year property for tax purposes. The income tax rate for the company is 39%, and it expects to have an after-tax rate of return of 12% for all its investments. The equipment generated an annual income of $100,000 for the first four years. The customer decided not to renew the contract after 4 years. Consequently, the company decided to sell the equipment for $180,000 at the end of 4 years. Determine if the company obtained the expected after-tax rate of return on this investment. Use the short-cut method.