The BVM Corp., construction company, purchased a used hybrid electric pickup truck for 30,000 and used MACRS depreciation in the income tax return. During the time the company had the truck, they estimiated that it saved 9500 a year. At the end of 4 years. BVM sold the truck for 9000. The combined federal and state income tax rate for BVM is 40%. Compute the after-tax rate of return for the truck

The BVM Corp.

The After-tax Rate of Return for the truck = After-Tax Income/Investment in Truck x 100

= $10,200/$30,000 x 100 = 34%

Explanation:

a) Calculations:

Current Value of the Truck =

Sale of Truck =             $9,000

Savings from Truck = $38,000 ($9,500 x 4)

Total                           $47,000

Investment increase  = $17,000 ($47,000 - 30,000)

Combined Tax = $6,800 (40% x $17,000)

After Tax Income = $10,200 ($17,000 - 6,800)

b) MACRS means the modified accelerated cost recovery system.  It is an allowance by the IRS for faster depreciation in the first years of an asset's life and the depreciation slows later on in order to allow a business to recover the cost basis of certain assets that deteriorate over time.

c) Rate of return (ROR) is the percentage increase or decrease of an investment (truck) over a set period of time (4 years), which is calculated by taking the difference between the current (or expected) value ($47,000) and original value ($30,000), dividing by the original value, and then this is multiplied by 100.

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