Dorothy & George Company is planning to acquire a new machine at a total cost of

Question

Dorothy & George Company is planning to acquire a new machine at a total cost of $52,400. The machine’s estimated life is six years and its estimated salvage value is $500. The company estimates that annual cash savings from using this machine will be $11,000. The company’s after-tax cost of capital is 9% and its income tax rate is 40%. The company uses straight-line depreciation (non-MACRS-based). (Use Appendix C, Table 1 and Appendix C, Table 2.) (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round "Payback period" to 2 decimal places and all other answers to the nearest dollar amount.)

Required:

1. What is this investment’s net after-tax annual cash inflow?

2. Assume that the net after-tax annual cash inflow of this investment is $8,000; what is the payback period?

3. Assume that the net after-tax annual cash inflow of this investment is $8,000; what is the net present value (NPV) of this investment?

4. What are the minimum net after-tax annual cost savings that make the proposed investment acceptable (i.e., the dollar cost savings that would yield an NPV of $0)?

Explanation / Answer

Answer:1 Depreciation per year=(52400-500)/6=8650

Answer:2 Payback period=$52400/$8000=6.55 years

Answer:3

Answer:4

Annual cash Savings 11000 Less: Dep 8650 Taxable income 2350 Less: Tax rate @40% 940 Earning after tax 1410 Add: Dep 8650 Net after-tax annual cash inflow 10060

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