Effect of capital structure on companies value per

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Reference no: EM13356968

Effect of capital structure on companies value per share.

After-tax cash flows: payback NPV; PI; IRR

Fabulous Fashions is considering the purchase of computerized clothes designing software. The software is expected to cost$160,000, have a useful life of five years, and have zero salvage value at the end of its useful life. Assume tax regulations permit the following depreciation patterns for this asset:

Year	Percent Deductible
1	20
2	32
3	19
4	15
5	14

The company's tax rate is 30 percent and its cost of capital is 8 percent. The software is expected to generate cash savings and cash expenses:

Year	Cash Savings	Cash Expenses
1	$61,000	$9,000
2	67,000	8,000
3	72,000	13,000
4	60,000	9,000
5	48,000	5,000

a. Prepare a time line presenting the after-tax operating cash flows
b. Determine the following on an after-tax basis; payback period, net present value, profitability index and internal rate of return.

Reference no: EM13356968

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