Question: New equipment purchase, income taxes. Walker Inc. is considering the purchase of new equipment that will automate production and thus reduce labor costs. Walker made the following estimates related to the new machinery:
Assume depreciation is calculated on a straight-line basis for tax purposes. Assume all cash flows occur at year-end except for initial investment amounts.
1. Calculate
(a) net present value,
(b) payback period,
(c) discounted payback period, and
(d) internal rate of return.
2. Compare and contrast the capital budgeting methods in requirement 1.