The profitable Palmer Golf Cart Corp. is considering investing $300,000 in special tools for some of the plastic golf cart components. The present golf cart model will continue to be manufactured and sold for 5 years, after which a new cart design will be needed, together with a different set of special tools.
The saving in manufacturing costs, owing to the special tools, is estimated to be $150,000 per year for 5 years. Assume MACRS depreciation for the special tools and a 39% combined income tax rate.
(a) What is the after-tax payback period for this investment?
(b) If the company wants a 12% after-tax rate of return, is the desirable investment?
NOTE: Please Use a net tax rate of 22.98% for the problem (disregard the rate given in the problem)