Problem:
ABC Corp is considering the various benefits that may result from the shortening of its products cycle by changing from the company's present manual system to a computer-aided design / computer-aided manufacturing (CAD/CAM) system. The proposed system can provide productive time equivalence close to the 20,000 hours currently available with the manual system. The incremental annual out of pocket costs of maintaining the manual system are $20 per hour.
The incremental annual out of pocket costs of maintaining the CAD/CAM system are estimated to be $200,000, with an initial investment of $ 480,000 in the proposed system. The estimated useful life of this system is six years. They use a straight - line method and no salvage will be available. The tax rate will be 30% over the life of this project. ABC Corp requires a minimum after tax return of 20% on project of this type. Full capacity will be utilized.
1. Compute the relevant annual after-tax cash flow
2. Based on the computation in the #1, find the the following (after-tax)
a. payback period recovery of investment
b. net present value
c. profitability index
Please show calculations.