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3. Assume that a machine costing $300,000 and having a useful life of five years (with no salvage value) generates a constant yearly income before
3. Assume that a machine costing $300,000 and having a useful life of five years (with no salvage value) generates a constant yearly income before depreciation and taxes of $120,000. Compute the annual rate of return on this machine (using the beginning-of- year book value as the base, i.e. net income after taxes / beginning-of-year book value) for each of the following depreciation methods (assume a 25% tax rate): a Straight-line method (1 mark) b. Declining balance method (Hints: When depreciation expense using the declining- balance method falls below the straight-line rate, it is common practice to use the straight-line rate for the remaining periods.) (1 mark) 3. Assume that a machine costing $300,000 and having a useful life of five years (with no salvage value) generates a constant yearly income before depreciation and taxes of $120,000. Compute the annual rate of return on this machine (using the beginning-of- year book value as the base, i.e. net income after taxes / beginning-of-year book value) for each of the following depreciation methods (assume a 25% tax rate): a Straight-line method (1 mark) b. Declining balance method (Hints: When depreciation expense using the declining- balance method falls below the straight-line rate, it is common practice to use the straight-line rate for the remaining periods.) (1 mark)
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