Question :
Kravitz Company is planning to get a $250,000 machine to enhance manufacturing efficiencies, thereby reducing annual cash operating costs before taxes by $80,000 for each of the next 5 years. The company has a minimum rate of return of 8 percent on all capital investments. The machine can be depreciated using straight-line method over a five-year life with no salvage value at the end of five years. Fritz is subject to a combined 40% income tax rate.
Note: at 8%, the PV annuity factor for 5 years is 3.993; at 8%, the PV $1 factor for year 1 = 0.926, the PV $1 factor for year 2 = 0.857, the PV $1 factor for year 3 = 0.794, the PV $1 factor for year 4 = 0.735, and the PV $1 factor for year 5 = 0.681.
Required:
1. Determine net present value of the proposed investment?
2. What is the present value payback period, in years?
3. Determine the estimated internal rate of return (IRR) on the proposed investment?