A new equipment would provide annual cash savings of $84 000 before income taxes.
The equipment would cost $216 000 and have an estimated useful life of five years.
The equipment is expected to have no salvage value at the end of five years.
Straight-line depreciation method is used for all equipment for both accounting and tax purposes.
TAX RATE : 40% After-tax required rate of return: 12%
1. For investment in new equipment, calculate the after-tax:
a) payback period
b) accounting rate of return
c) net present value
d) profitability index
e) internal rate of return
(Assume that all operating revenues and expenses occur at the end of the year.)
2. Identify and discuss the issues that COMPANY management should consider when deciding which of the five techniques identified in requirement 1 should be employed to evaluate alternative capital investment projects.