After-tax market rate of return on development investments

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The research and development division of a large corporation is considering the purchase of a new tunneling X-ray microscope for $320,125. The projected net benefits from gains in materials engineering is projected to be $127,000 in today’s real dollars for the first year, increasing by an arithmetic gradient of $20,000 per year in real dollars for years 2 to 4. The unit will be depreciated under MACRS. Due to increasing advances in tunneling X-ray microscope technology, the unit will have $60,000 market value in today’s real dollars at the end of the 4 year project life. During the 4 year analysis period, inflation is expected to be steady at 3.8% per year. The corporation has a combined state and federal income tax rate of 40.0%. The corporation requires a 20.0% after-tax market rate of return on its research and development investments. Should the X-ray unit be purchased?

Reference no: EM131188091

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