A small research device is purchased for $10,000 and depreciated by MACRS depreciation. The net benefits from the device, before deducting depreciation, are $2000 at the end of the first year and increasing $1000 per year after that (second year equals $3000, third year equals $4000, etc.), until the device is hauled to the junkyard at the end of 7 years. During the 7-year period there is an inflation rate f of 7%.
This profitable corporation has a 50% combined federal and state income tax rate. If it requires a 12% after-tax rate of return on its investment, after taking inflation into account, should the device have been purchased?