Determine (a) the before-tax ROR, and (b) approximate after-tax ROR for a project that has a first cost of $750,000, a salvage value of 25% of the first cost after 3 years, and annual (GI-OE) of $260,000. Assume the company has a Te of 37%.
What will be an ideal response?
(a) Before-tax ROR: 0 = -750,000 + 260,000(P/A,i*,3) + 187,500(P/F,i*,3)
i* = 12.60%
(b) Approximate after-tax ROR = (before-tax ROR) (1-Te)
= 12.60(1 – 0.37)
= 7.94%
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