392 INCOME TAXESbags from the cardboard cartons. 200,000 cartons
will be ,checked on the weighing equipment each
year, with an average removal of 3.5 padded bags per
carton with a manufacturing cost of 3 cents per bag.
This large profitable corporation has a 50% combined
federal-plus-state incremental tax rate. Assume a
lO-year study period for the analysis and an after-tax
MARR of 20%.
Compute:
(a)The after-tax present worth of this investment.
(b)The after-tax internal rate of return of this
investment.
(c) The after-tax simple payback period of this
investment.
12-28 Mr. Sam K. Jones, a successful businessman, is con-
sidering erecting a small building on a commercial
lot he owns very close to the center of town. A local
furniture company is willing to lease the building for
$9000 per year, paid at the end of each year. It is a net
lease, which means the furniture company must also
pay the property taxes, fire insurance, and all other
annual costs. The furniture company will require a
5-year lease with an option to buy the building and
land on which it stands for $125,000 at the end of
the 5 years. Mr. Jones could have the building con-
structed for $82,000. He could sell the commercial
lot now for $30,000, the same price he paid for it. Mr.
Jones files a joint return and has an annual taxable
income from other sources of $63,900. He would de-
preciate the commercial building by modified accel-
erated cost recovery system (MACRS) depreciation.
Mr. Jones believes that at the end of the 5-year lease
he could easily sell the property for $125,000. What
is the after-tax present worth of this 5-year venture if
Mr. Jones uses a 10% after-taxMARR?12-29 One January Gerald Adair bought a small house and
lot for $99,700. He estimated that $9700 of this
amount represented the value of the land. He rented
the house for $6500 a year during the 4 years he owned
the house. Expenses for property taxes, maintenance,
and so forth were $500 per year. For tax purposes
the house was depreciated by MACRS depreciation
(27 .5-year straight-line depreciation with a midmonth
convention is used for rental property). At the end of
4 years the property was sold for $105,000. Gerald is
married and works as an engineer. He estimates that
his incremental state and federal combined tax rate is
24%. What after-tax rate of return did Gerald obtain
on his investment in the property?
12-30 A corporation with a 34% income tax rate is consider_
ing the following investment in research equipment
and has projected the benefits as follows: 'Year
o 1 2 3 4 5 6Before-Tax
Cash Flow
-$50,000
+2,000
+8,000
+17,600
+ 13,760
+5,760
+2,880Prepare a cash flow table to determine the year-
by-year after-tax cash flow assuming MACRS
depreciation.
(a)What is the after-tax rate.ofreturn?.
(b)What is the before-tax rate of return?
12-31 An engineer is working on the layout of a new re-
search and experimentation facility. Two plant op-
erators will be required. If, however, an. additional
$100,000 of instrumentation and remote controls
were added, the plant could be run by a single oper~-
tor. The total before-tax cost of each plant operator is
projected to be $35,000 per year~The instrumentation
and controls will be depreciated by means of the mod-
ified accelerated cost recovery system (MACRS).
If this corporation (34% corporate tax rate) in-
vests in the additional instrumentation and controls,
how long will it take for the after-tax benefits to equal
the $100,000 cost? In other words, what is the after-
tax payback period? (Answer:3.24 years).
12-32 A special power tool for plastic products costs $400,
has a 4-year useful life, no salvage value, and a 2-year
before-tax payback period. Assume uniform annual
end-of-year benefits.
(a) Compute the before-tax rate of return.
(b) Compute the after-tax rate of return, based on
MACRS depreciation and a 34% corporate in-
come tax rate.
12-33 The Ogi Corporation, a construction company, pur-
chased a pickup truck for $14,000 and used MACRS
depreciation in the income tax return. During the time
the company had the truck, they estimated that it saved
$5000 a year. At the end of 4 years, Ogi sold the truck
for $3000. The combined federal and state income
tax rate for Ogi is 45%. Compute the after-tax rate of
return for the truck. (Answer:12.5%)-- ---