EXERCISE 4–1 Assume that a machine costing $300,000 and having a useful life of five years (with no salvage PROBLEM 4–7 value) generates a yearly income before depreciation and taxes of $100,000.

Required:

Compute the annual rate of return on this machine (using the beginning-of-year book value as the base) for each of the following depreciation methods (assume a 25% tax rate):

a. Straight-line

b. Sum-of-the-years’ digits