Determine the after-tax rate of return on the investment

Reference no: EM13225156

Uncle Elmo is contemplating a $10,000 investment in a methane gas generator. He estimates his gross income would be $2000 the first year and increase by $200 each year over the next 10years. His expenses of $200 the first year would increase by $200 each year over the next 10 years. He would depreciate the generator by MACRS depreciation, assuming a 7-year property class. A l0-year-old methane generator has no market value. The income tax rate is 40%.

(a) Construct the after-tax cash flow for the 10 year project life.
(b) Determine the after-tax rate of return on this investment. Uncle Elmo thinks it should be at least 8%.
(c) If Uncle Elmo could sell the generator for $7000 at the end of the fifth year, would his rate of return be better than if he kept the generator for 10years?

Reference no: EM13225156

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