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problem: Julia Corp. is in the business of making sugar cookies.  The company is considering the purchase of a new cookie making equipment which will improve its manufacturing process and result in significant cost savings.  The equipment costs $250,000 and the resulting financial impact is an after-tax cash flow savings of $60,000 in yr. 1 with this savings increasing by $10,000 annually with the 5th year resulting in after-tax cash flow savings of $100,000.  At the end of the 5th year the equipment will be sold for $10,000.  Assume that the prevailing market rate of interest is 13%.

[A] Determine the payback period for the proposed investment?

[B] Suppose that sale of the equipment at the end of five years would net the firm 200,000, rather than $10,000.  Now determine the payback period for the proposed investment?

[C] Suppose the required return changes to 15%.  Determine the project's discounted payback period?  Assume that the equipment can be sold for 10,000 at the end of the 5th year.

[D] Suppose the required return is 15%. determine the project's net present value? Suppose that the equipment can be sold for 10,000 at the end of the 5th year.

[E] Suppose a required return is 15%, determine the project's profitability index?

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  • Category:- Basic Finance
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