Question

Jefferson Company is considering investing $33,000 in a new machine. The machine is expected to last five years and to have a salvage value of $8,000. Annual before-tax net cash inflow from the machine is expected to be $7,000. Calculate the unadjusted rate of return. The income tax rate is 40%.

Answer 1

Jefferson Company the un-adjusted rate of return is 3.64%

Step-by-step explanation:

To Find-out the Un-adjusted Rate of return we have to compute the Depreciation Cost

Depreciation Cost = (Investment - Salvage Cost) / Machine Life

Depreciation Cost = ($33,000 - $8,000) / 5

Depreciation Cost = $25,000 / 5

Depreciation Cost = $5,000

Net Income = (Annual before tax net cash inflow - Depreciation Cost) × (1 - Income Tax Rate)

Net Income = ($7,000 - $5,000) × (1 - 40%)

Net Income = ($2,000) × (0.60)

Net Income = $1,200

Un-Adjustable Rate of Return = Net Income / Investment

Un-Adjustable Rate of Return = $1,200 / $33,000

Un-Adjustable Rate of Return = 3.64%