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A small research device can be purchased for $20,000 and depreciated by MACRS depreciation. The net benefits from the device, before deducting depreciation, are $3000

 

A small research device can be purchased for $20,000 and depreciated by MACRS depreciation. The net benefits from the device, before deducting depreciation, are $3000 at the end of the first year and increasing $3000 per year after that (second year equals $4000, third year equals $5000, etc.), until the device is hauled to the junkyard at the end of 7 years. During the 7-year period there will be an inflation rate f of 8%.

This profitable corporation has a 30% combined federal and state income tax rate. If it requires a real 10% after-tax rate of return on its investment, should the device be purchased?

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