Uncle Elmo is contemplating a $10,000 investmentin a

Chapter , Problem 12-45

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Uncle Elmo is contemplating a $10,000 investmentin a methane gas generator. He estimates his grossincome would be $2000 the first year and increaseby $200 each year over the next 10 years. Hisexpenses of $200 the first year would increase by$200 each year over the next 10 years. He woulddepreciate the generator by MACRS depreciation,assuming a 7-year property class. A 10-year- oldmethane generatorhas no marketvalue. The income tax rate is 40%. (Remember that recaptured depre-ciation is taxed at the same 40% rate.)(a)Construct the after-tax cash flow for the 10- yearproject life.(b)Determine the after-tax rate of return on thisinvestment. Uncle Elmo thinks it should be atleast 8%.(c)If Uncle Elmo couldsellthe generatorfor $7000at the end of the fifth year, would his rate ofreturn be better than if he kept the generator for10 years? You dont have to actually find therate of return, just do enoughcalculations to seewhether it is higher than that of part (b).