Effect of capital structure on companies value per share.
After-tax cash flows: payback NPV; PI; IRR
Fabulous Fashions is considering the purchase of computerized clothes designing software. The software is expected to cost$160,000, have a useful life of five years, and have zero salvage value at the end of its useful life. Assume tax regulations permit the following depreciation patterns for this asset:
|
Year
|
Percent Deductible
|
|
1
|
20
|
|
2
|
32
|
|
3
|
19
|
|
4
|
15
|
|
5
|
14
|
The company's tax rate is 30 percent and its cost of capital is 8 percent. The software is expected to generate cash savings and cash expenses:
|
Year
|
Cash Savings
|
Cash Expenses
|
|
1
|
$61,000
|
$9,000
|
|
2
|
67,000
|
8,000
|
|
3
|
72,000
|
13,000
|
|
4
|
60,000
|
9,000
|
|
5
|
48,000
|
5,000
|
a. Prepare a time line presenting the after-tax operating cash flows
b. Determine the following on an after-tax basis; payback period, net present value, profitability index and internal rate of return.