Bob Jensen Inc. purchased a $540,000 machine to manufacture specialty taps for electrical equipment. Jensen expects to sell all it can manufacture in the next 10 years. To encourage capital investments, the government has exempted taxes on profits from new investments. This legislation is to be in effect for the foreseeable future. The machine is expected to have a 10-year useful life with no salvage value. Jensen uses straight-line depreciation. Jensen uses a 9% discount rate in evaluating capital investments, the investment is subject to taxes, and the projected pretax operating cash inflows are as follows:

YearPretax Cash Inflow1$42,000 2 68,000 3 100,000 4 165,000 5 196,000 6 244,000 7 232,000 8 198,000 9 92,000 10 61,000

Jensen has been paying 25% for combined federal, state, and local income taxes, a rate that is not expected to change during the period of this investment. The firm uses MACRS depreciation. The asset qualifies as a 5-year property.