Reduce the overall level of taxable income

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Reference no: EM132029017

Suppose you own AAA rentals and you have a small used tractor you bought early last year for $30,000. This unit generated $24,000 in rental income for year -1 and corresponding maintenance and operating costs in that period of $4,000. The machine is five (5) year MACRS property and you took the first year of depreciation last year (year -1). If you keep it, the machine is in need of an $8,000 repair cost that could be expensed at time zero. Rental income is estimated at $12,000 at time zero and $24,000 per year in 1 and 2 with $12,000 in year 3. Operating expenses will be $2,000 in time zero and $4,000 per year in 1 and 2 and $2,000 in year 3. End of year-3 salvage value is estimated at $10,000. Other equipment rental income exists against which to use all deductions and reduce the overall level of taxable income. The effective tax rate is 25% and the escalated dollar after-tax minimum rate of return is 10%. Calculate the NPV and ROR.

Reference no: EM132029017

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