Homework Sourse1119 An incomeproducing asset costs 60 000 has an estimated
11.19 An income-producing asset costs $60 000, has an estimated useful-life of 7 years, has no salvage value after installation,and is expected to produce annual net savings of $15 000. The company\'s tax rate is 52%. Compute (a) the before-tax ROR, and (b) the after- tax ROR under straight-line depreciation. answer: a) 16.3% b)8.6 %
Solution
Annual depreciation = $60,000 / 7 = $8,571
(a) Before Tax ROR (Excludes depreciation)
(b) After-tax ROR (Considers depreciation)
Working note: Depreciation being a non-cash expense, is added back to after-tax net annual benefits to derive at net cash flow.
NOTE: The slight difference in ROR is due to rounding off.
| Before-Tax ROR | |||
| Year | Initial Cost ($) | Annual Benefit ($) | Net Annual Benefit ($) |
| (A) | (B) | (A) + (B) | |
| 0 | -60,000 | -60,000 | |
| 1 | 15,000 | 15,000 | |
| 2 | 15,000 | 15,000 | |
| 3 | 15,000 | 15,000 | |
| 4 | 15,000 | 15,000 | |
| 5 | 15,000 | 15,000 | |
| 6 | 15,000 | 15,000 | |
| 7 | 15,000 | 15,000 | |
| ROR (%) = | 16.3% |
