Reference no: EM132755282

Question - Anna's Bakery plans to purchase a new oven for its store. The oven has an estimated useful life of 4 years. The estimated pretax cash flows for the oven are as shown in the table that follows, with no anticipated change in working capital. Anna's Bakery has a 12% after-tax required rate of return and a 40% income tax rate. Assume depreciation is calculated on a straight-line basis for tax purposes using the initial oven investment and estimated terminal disposal value of the oven. Assume all cash flows occur at year-end except for initial investment amounts. Equipment is subject to 20% CCA rate declining balance for income tax purposes.

Relevant cash flow at end of each year-----0 1 2 3 4

Initial machine investment (88,000)

Annual cash flow from operations 36,000 36,000 36,000 36,000 (excluding the depreciation effect)

Cash flow from terminal disposal of motor 8,000

Required -

1) Calculate the payback period and internal rate of return using the calculator BA II plus no annuity tables allowed.

2) Compare and Contract the capital budgeting methods in requirement?