What is the After Tax Rate of Return for PARC?

PARC a large profitable firm has an opportunity to expand one of its production facilities at a co Show more PARC a large profitable firm has an opportunity to expand one of its production facilities at a cost of $375000. The equipment is expected to have a useful life of 10 years and to have a resale value of $25000 after 10 years of use. If the expansion is undertaken PARC expects that their income will increase by $60000 for year 1 and then increase by $5000 each year through year 10 ($65000 for year 2 $70000 for year 3 $105000 for year 10). If the equipment is purchased PARC will depreciate it using a 7 year class life and MACRS depreciation. PARC will receive a 10% investment tax credit if the equipment is purchased. The annual operating cost for the expansion is expected to be $5000 for the first year and to increase by 5% per year ($5250 for year 2 $5512.50 for year 3 $7756.64 for year 10). If the equipment is purchased PARC will pay $175000 down and finance the balance with a 5-year 12% loan payable in annual payments. Since PARC is a large and profitable firm their tax rate is 46% and their ordinary gains are taxed at a rate of 28%. What is the After Tax Rate of Return for PARC? Given the current economy would you suggest PARC do the expansion? Hints: You will need to calculate the loan payment for the equipment. To BTCF will be the Income Loan Payment Operating Expense Note: Ordinary gains are taxed differently than income There is a tax credit of 10%. The tax credit is applied to the entire purchase price (i.e. $375000). This will reduce Period 0 amount in the ATCF. Show less

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