Chapter 12 Capital Budgeting Decisions Payback Period and NPV: Taxes and Straigh

Question

Chapter 12 Capital Budgeting Decisions Payback Period and NPV: Taxes and Straight-Line Depreciation Assume that United Technologies Corporation is evaluating a proposal to change the company's manual design system to a computer-aided design (CAD) system. The proposed system is expected to save 13,500 design hours per year; an operating cost savings of $55 per hour. The annual cash ex- penditures of operating the CAD system are estimated to be $300,000. The CAD system requires an initial investment of $750,000. The estimated life of this system is five years with no salvage value. The tax rate is 35 percent, and United Technologies uses straight-line depreciation for tax purposes United Technologies has a cost of capital of 14 percent. Required a. Compute the annual after-tax cash flows related to the CAD project. b. Compute each of the following for the project: 6 P12-31. l. Payback period. 2. Net present value.

Explanation / Answer

a. Annual after-tax cash flows: $640,125

b.1. Payback period: 1.17 years

Payback period = Initial investment / Annual cash inflows = $750000 / $640125 = 1.17 years

b.2. Net present value: $1,447,549

Operating cost savings (13500 x $55) $ 742500 Less: Expenses Operating cash expenditures 300000 Depreciation ($750000/5 years) 150000 450000 Operating income 292500 Taxes @ 35% 102375 Net operating income $ 190125 Add: Non-cash depreciation expense 450000 Annual after-tax cash flows $ 640125

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.