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The research and development division of a large corporation is considering the purchase of a new tunneling X-ray microscope for $200,000. The projected net benefits from gains in materials engineering is projected to be $45,000 in today's real dollars for the first year, increasing by an arithmetic gradient of $10,000 per year in real dollars for years 2 to 4, leveling off at $75,000 per year in today's real dollars in years 5 and 6, and declining to $60,000 in today's real dollars in year 7. The unit will be depreciated under MACRS. Due to increasing advances in tunneling X-ray microscope technology, the unit will have $1,000 salvage value in today's real dollars at the end of its 7 year life. During the 7 year analysis period, inflation is expected to be steady at 4.5% per year. The corporation has a combined state and federal income tax rate of 40%. The corporation requires a 20% aftertax market rate of return on its research and development investments. Should the X-ray unit be purchased?

Econometrics, Economics

  • Category:- Econometrics
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