A company is considering the installation of a new machine t

A company is considering the installation of a new machine that costs $150,000. The machine is expected to lead to new net income of $40,000 per year for the next five years. Using SL depreciation, $0 salvage value, and an effective income tax rate of 50%; determine the after-tax rate of return for this investment. If the company\'s after-tax MARR rate is 10%, would this be a good investment or not?

Solution

Net income indicates return which is after taxed and after depreciation.

Net income = $40,000

After-tax rate of return = (Net income / Total investment) × 100

                                           = ($40,000 / 150,000) × 100

                                           = 26.67% (answer)

This is a good investment, since the MARR is smaller than the After-tax rate of return.