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Biometric security device manufacturing equipment

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Innovantec Inc. is a B2C payment services company that is seeking to acquire biometric security device manufacturing equipment, and wishes to conduct a capital budgeting analysis. The equipment costs $245,000 and will last five (5) years before it must be replaced. The 5 year project is expected to produce after-tax cash flows of $70,000 in the first year, and increase by $10,000 annually; the after-tax cash flow in year 5 will reach $110,000. In addition, salvage value of the equipment will net the firm $15,000 in additional cash at the end of five years, making the total cash flow in year 5 of $125,000. Projects must pay back within 4 years.

(a) Does the payback period for the proposed investment support acceptance?

(b) If the required return is 15%, is the project's discounted payback period favorable?

(c) Assuming the required return is 15%, is the project's net present value favorable?

(d) If the required rate of return is 25% does the IRR support acceptance of the investment?

(e) Does the project's profitability index support proceeding if the required return is 15%?

Reference no: EM133307293

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