A Company is considering to invest $480,000 in equipment. Data related to the investment are as follows:
| Year |
Income Before Depreciation and Taxes |
| 1 |
$130,000 |
| 2 |
$130,000 |
| 3 |
$130,000 |
| 4 |
$130,000 |
| 5 |
$130,000 |
| 6 |
$130,000
|
Cost of capital is 14 percent.
Bright uses the straight-line method of depreciation for tax purposes. In addition, its tax rate is 35% and the depreciable life of the equipment is 6 years. The equipment has an estimated salvage value of $60,000 at the end of the 6 year. Assume a full year of depreciation is taken in each of the 6 years.
Questions:
- Calculate the after-tax cashflows for the first year.
- Calculate the accounting rate of return on average investment for year 1.
- Calculate the payback period.
- Calculate the net present value (NPV)
- Calculate the internal rate of return (IRR)