Payback Period and NPV: Taxes and Straight-Line Depreciation
Assume that United Technologies Corporation is evaluating a proposal to change the company’s manual design system to a computer-aided design (CAD) system. The proposed system is expected to save 12,000 design hours per year; an operating cost savings of $65 per hour. The annual cash expenditures of operating the CAD system are estimated to be $600,000. The CAD system requires an initial investment of $200,000. The estimated life of this system is five years with no salvage value. The tax rate is 21%, and United Technologies uses straight-line depreciation for tax purposes. United Technologies has a cost of capital of 14%.
(a) Compute the annual after-tax cash flows related to the CAD project.
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(b) Compute each of the following for the project:
1. Payback period.
Round your answers to two decimal places. For example, enter 8.84 for 8.844 and 8.85 for 8.845.
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years
2. Net present value. (Round answer to the nearest whole number.)
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