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Problem - Adams Company is evaluating a new tractor that costs $1,350,000 to replace the tractor purchased years earlier, which currently has no salvage value; the new tractor has an estimated useful life of five years with no disposal value or anticipated cost of disposal. The company uses straight-line depreciation with no residual value on all equipment. Adams is subject to a 40% income tax rate. The company uses a 12% hurdle rate for evaluating capital investment projects. The PV of an annuity of $1 at 12% for 5 years is 3.605, and the PV of $1 at 12% in 5 years is 0.567.
Compute the amount of before-tax savings that must be generated by the new tractor to have a payback period of no more than 3 years.
Compute the amount of before-tax savings that must be generated by the new tractor to have a NPV of at least $500,000 at a desired rate of return of 12%.
Compute the amount of before-tax savings that must be generated by the new tractor to have an IRR of 12%.
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