Zeon Large Profitable Corporation Is Considering

Zeon, a large, profitable corporation, is considering adding some automatic equipment to its production facilities. An investment of $120,000 will produce an initial annual benefit of $29,000, but the benefits are expected to decline $3000 per year, making second year benefits $26,000, third-year benefits $23,000, and so forth. If the firm uses sum-of-years’ -digits depreciation, an 8-year useful life, and $12,000 salvage value, will it obtain the desired 6% after-tax rate of return? Assume that the equipment can be sold for its $12,000 salvage value at the end of the 8 years. Also assume a 46% income tax rate for state and federal taxes combined.

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