Question

A small vessel was purchased by a chemical company for $55,000 and is to be depreciated by MACRS depreciation. When its requirements changed suddenly, the chemical company leased the vessel to an oil company for 6 years at $10,000 per year. The lease also provided that the vessel could be purchased at the end of 6 years by the oil company for $35,000. At the end of the 6 years, the oil company exercised its option and bought the vessel. The chemical company has a 34% incremental tax rate. Compute its after-tax rate of return on the vessel.​

Answer 1

Answer:

A small vessel (this means 10 year life) was purchased by a chemical company for $55,000 and is to be depreciated by MACRS depreciation.

When its requirements changed suddenly, the chemical company leased the vessel to an oil company for 6 years at $10,000 per year. The lease also provided that the vessel could be purchased at the end of 6 years by the oil company for $35,000. At the end of the 6 years, the oil company exercised its option and bought the vessel. The chemical company has a 34% incremental tax rate. Compute its after-tax rate of return on the vessel. (Answer: 9.86%)