The effective combined tax rate in an owner-managed corporation is 40%. An outlay of $20,000 for certain

Question:

The effective combined tax rate in an owner-managed corporation is 40%. An outlay of $20,000 for certain new assets is under consideration. It is estimated that for the next 8 years, these assets will be responsible for annual receipts of $9000 and annual disbursements (other than for income taxes) of $4000. Meter this time, they will be used only for stand-by purposes, and no future excess of receipts over disbursements is estimated.

(a) What is the prospective rate of return before income taxes?

(b) What is the prospective rate of return after taxes if straight-line depreciation can be used to write off these assets for tax purposes in 8 years?

(c) What is the prospective rate of return after taxes if it is assumed that these assets must be written off for tax purposes over the next 20 years, using straight-line depreciation?

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