Please show your work with explanation for the following Engineering Economic Analysis Problem.
A machine was purchased 4 years ago for $28,000. Its estimated life was 7years with $0 salvage. Its market value today is $35,000. It is thought that its market value in 3 more years will $12,000. 5 year MACRS depr is being used. BTCF last year was $26,000 and is fully inflation responsive. Inflation is expected to average 3.5% for each of the next 3 years. The tax rate is 40% on ordinary income and 20% on capital gains.
Calculate the prospective inflation free IRR (io) for this machine if it is kept for three more years.