Reference no: EM132776048
Question - Tandon manufacturing is considering an investment in a numerically controlled machine to save on manufacturing costs. The cost of the machine can be fully depreciated without consideration of any salvage value at the end of the useful life. At the end of the fourth year, the firm would need to spend an additional amount to update some hardware and the entire amount of expenditure to update the hardware is tax deductible in the same year as operating expense. You have been provided with the following data:
Cost of the numerically controlled machine $340,000
The useful life of the machine 6
The salvage value of the machine at the end of the useful life $20,000
Annual cost savings for the first four years $90,000
Annual cost savings for the next two years $50,000
Investment required to update hardware in the fourth year $70,000
The company's required rate of return 8% Company's income tax rate 30%
The machine is depreciated for income tax purposes based on a five year life using straightline depreciation method.
Required -
a) Calculate the NPV of the project.
b) Calculate the IRR of the project.
c) Calculate the payback period (NOT discounted payback period).
d) Calculate the Accrual Accounting Rate of Return assuming that the depreciation scheme is the same as for tax reporting. Use the gross investment in the denominator to calculate the AARR.
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