Bayleaf Inc. is considering the purchase of a machine that costs $200,000.
Installation costs are $20,000 which are going to be deemed an “expense” when the installation is done
The machine is expected to generate additional revenues of $150,000 per year for four years while incurring annual operating costs of $50,000 a year.
The machine would be depreciated for tax purposes using the straight-line method over the life of the asset and will utilize a $30,000 salvage value in the calculation of depreciation expense
It is expected that we would received $40,000 upon the sale of the equipment at the end of its life.
At the end of two years of operations the Company will have to pay $10,000 for an overhaul of the machine which would be deemed an expense in the year paid
The Company considers the impact of income taxes in all of its capital investment decisions. The company has a 30% income tax rate
The Company desires an after-tax rate of return of 10% on its investment.
Required:
List all the Cash flows associated with the NPV calculation of this problem.
Explain the payback period method.