Reference no: EM132593417

Jumpin Jack (JJ) Flash manages the Philadelphia division of a Total Fitness, Inc., a national health and exercise club. JJ has the opportunity to expand the operation of his division by investing in additional equipment costing $300,000. JJ expects that the equipment will have a useful life of 5 years and will have no salvage value at the end of that time. In addition, he estimates that the annual net cash inflow (and operating income before depreciation) for this investment will be $98,000 before taxes. The income tax rate is 35%. If JJ makes the investment, the equipment will be depreciated using the straight-line method for tax and accounting purposes. Total Fitness, Inc. requires an after-tax rate of return of 12% for all investments. It measures the investment for a year as the accounting book value of the invested assets at the beginning of that year.

Required:

For each of the questions below, assume that all cash flows occur at y ar-end except for the initial investment.

Question 1: What is the expected net present value of the cash flows for the investment? (Round your answer to 2 decimals and use par ntheses ( ) to indicate a negative amount.)

Question 2: What is the expected payback period for the investment? (Round your answer up to the nearest whole year.)

Question 3: What is the expected after-tax accounting rate of return for the investment for the first year of operation? (Round your answer to 2 decimals and use parentheses ( ) to indicate a negative amount.)

Question 4: What is the expected residual income for the investment for the first year of operation? (Round your answer to 2 decimals and use parentheses ( ) to indicate a negative amount.)