Production equipment costing $500,000 has been purchased by a contract manufacturing company to meet the specific needs of a customer (Note: this equipment qualified for a 10% investment tax credit (ITC) at the time of purchase). The contracting award is for a 4-year contract with the possibility of extending the contract for another 4 years. The company plans to use MACRS to depreciate this equipment as a 7-year class property for tax purposes. The income tax rate for the company is 40%, and it expects to have an after-tax rate of return (MARR) of 12% for all its investments. The equipment has generated an annual income of $150,000 for the company for the first four years, however the customer decided not to renew the contract after 4 years. Consequently, the company has decided to sell the equipment for $200,000 at the end of 4 years. Required:
Use the short-cut method to determine if the company has reached their rate of return (IRR) goal on this contract and investment.

Short-cut IRR = 18.75%

The company has not reached their rate of return goal on this contract and investment.

Explanation:

a) Data and Calculations:

Cost of production equipment = $500,000

Qualified investment tax credit (ITC) = 10% = $50,000 ($500,000 * 10%)

Contract period = 4 years with 4 years extension on renewal

Income tax rate for the company = 40%

Expected after-tax rate of return = 12%

Expected before-tax rate of return = 30% (12%/40%)

Annual income generated by the equipment = $150,000 for 4 years

Salvage value at the end of 4 years = $200,000

Short-cut IRR = 100%, divided by the number of years * about 75-80%

= 100%/4 * 75%

= 18.75%

the most important factor in the

work process or industry is to retain the interest of the employee. and to

retain them, their salary or profit must be adjusted to the best value. unless

the employee does not do his job properly, employees must receive bonuses or

benefits to ensure them to stay in the company. it will actually make them stay

longer, make them feel important and reduce costs for hiring new employees.

explanation:

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