## Question: An item with a 3-year MACRS property class for depreciation purposes

1. An item with a 3-year MACRS property class for depreciation purposes is purchased for \$30,000.It is sold at the end of 2 years for \$12,000. Net annual benefits from the use of this item are \$9,800 in year 1 and \$15,824 in year 2.
2. Fill up the following table to determine the company’s after tax cash flow for this investment. Assume the company is in 35% marginal tax bracket. Further assume that income tax rates for capital gains or losses are also 35%.
3. Write down the equation for computing the after tax rate of return for this investment. Do not compare the actual rate of return.

Table

Before Tax          MACRS                                 Taxable                Income                                                 After tax                      cash flow             depreciation                           income                    tax                                                   cash flow