The management of Iroquois National Bank is considering an investment in automat
ID: 2533532 • Letter: T
Question
The management of Iroquois National Bank is considering an investment in automatic teller machines. The machines would cost $134,400 and have a useful life of seven years. The bank’s controller has estimated that the automatic teller machines will save the bank $28,000 after taxes during each year of their life (including the depreciation tax shield). The machines will have no salvage value.
2. Compute the net present value of the proposed investment assuming an after-tax hurdle rate of: (a) 10 percent, (b) 12 percent, and (c) 14 percent. (Negative amounts should be indicated by a minus sign. Round your final answers to the nearest dollar amount.)
Which of the following statements are true?
The management of Iroquois National Bank is considering an investment in automatic teller machines. The machines would cost $134,400 and have a useful life of seven years. The bank’s controller has estimated that the automatic teller machines will save the bank $28,000 after taxes during each year of their life (including the depreciation tax shield). The machines will have no salvage value.
Explanation / Answer
Solution 1:
Initital investment = $134,400
Annual cash inflows = $28,000
Payback period = Initial investment / Annual cash inflows = $134,400 / $28,000 = 4.8 year
Solution 2:
Solution 3:
True statements are as under:
The net-present-value method is preferable to the payback method.
The payback period criterion fails to account for the time value of money.
The cut-off value for the payback period is very much dependent on the bank's hurdle rate.
Computation of NPV - Iroquois National Bank Particulars Amount Period Hurdle rate - 10% Hurdle rate - 12% Hurdle rate - 14% PV Factor Present Value PV Factor Present Value PV Factor Present Value Cash Outflows: Cost of Investment $134,400.00 0 1 $134,400 1 $134,400 1 $134,400 Present Value of Cash Outflows (A) $134,400 $134,400 $134,400 Cash Inflows: Annual cash inflows $28,000.00 1-7 4.868419 $136,316 4.563757 $127,785 4.288305 $120,073 Present Value of Cash Inflows (B) $136,316 $127,785 $120,073 Net Present Value (B-A) $1,916 -$6,615 -$14,327Related Questions
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