Reference- https://www.chegg.

com/homework-help/questions-and-answers/jet-fab-
bought-cnc-laser-cutting-machine-cos00-meet-specific-needs-customer-given-4-
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Question:
JET FAB bought a CNC laser cutting machine at a cost of capital $400,000 to meet the
specific needs of the customer that had given a 4-year contract with the possibility of
extending the contract for another 4 years. The company uses the MACRS depreciation
method for this equipment as 7-year property for tax purposes. The income tax rate for the
company is 39% and the company expects to have an after-tax rate of return of 10% in all its
investments.
The laser cutting machine generated an annual income of $80,000 for the first four years. The
customer decided not to renew the contract after 4 years due to circumstances beyond their
control. Consequently, the company ended up selling the CNC laser cutting machine for
$150,000. Determine if the company obtained the expected after-tax rate of return on this
equipment.
Insert context header here:

Context header: Capital Budgeting

Context explanation: Capital budget is the method of calculating the value of money and cash
inflows. Capital budgeting can be done by two methods. First one is deprecated method and
second is non depreciated method. Depreciated method use for present value of money and
non depreciated method is use for time value of money.
Answer and explanation:
Time = 4 year of contract
Capital budget invested or cost of machine = $400,000
Depreciation applied for 4 year
|year|Depreciation on cost of machine|Depreciation amount|
|1|14.29%|$57160|
|2|24.49%|$97960|
|3|17.49%|$69960|
|4|12.49%|$49960|
Total depreciation amount = $27, 5040
Given, machine cost = $400,000
At the end of 4 year written down value is $124960
Selling price = $200,000
Profit on sell = $75040
Given tax rate is 39% on profit on selling price of machine.
 39
 $75040 
100
 $29, 266

Therefore tax amount is $29,266

Total cash lows after giving tax and subtracting depreciation amount is $170,734

Now annual income is $80,000 for 4 years

Obtaining present value and expected rate of return is 10%
|year|yearly income|depriciation amount|before tax profit| tax =39%| profit after tax|
depreciation after tax|machine cost|total cash flows| rate of return 10%|PV|
|0||||||||-400000|-400000|1|-400000|
|1|80,000|57160|22840|8908|57160|-|71092|0.909|54523
|2|80,000|97960|-17960|-|97960|80000|-|80000|0.826|66080|
|3|80,000|69960|10040|3916|69960|76084|-|76084|0.751|57139|
|4|80,000|49960|30040|18324|49960|68284|170734|239018|0.683|163250|
Calculating present value
CF
PV=
 1+r 
t

Calculating from table, net present value, we obtained PV = -48908

As per calculation net present value shows negative amount and company doesn’t get any
benefit for investing on machine at the rate of 10%