Question

The management of Niagra National Bank is considering an investment in automatic teller machines. The machines...

The management of Niagra National Bank is considering an investment in automatic teller machines. The machines would cost $148,050 and have a useful life of seven years. The bank’s controller has estimated that the automatic teller machines will save the bank $31,500 after taxes during each year of their life (including the depreciation tax shield). The machines will have no salvage value.

Required:

1.Compute the payback period for the proposed investment. (Round your answer to 1 decimal place.)

2.Compute the net present value of the proposed investment assuming an after-tax hurdle rate of: (a) 10 percent, (b) 12 percent, and (c) 14 percent. (Negative amounts should be indicated by a minus sign.)

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Homework Answers

Answer #1

1.

Payback period = Initial Investment / Annual inflow

= $148050 / $31500

= 4.7 years.

2.

Net present value = present value of cash inflow - intital cash outflow

(a)

Net present value = $31500 x Present value Annuity factor (10%,7) - $148050

= $31500 x 4.86842 - $148050

= $153355 - $148050

= $5305.

(b)

Net present value = $31500 x Present value Annuity factor (12%,7) - $148050

= $31500 x 4.56376 - $148050

= $143758 - $148050

= - $4292

(c)

Net present value = $31500 x Present value Annuity factor (14%,7) - $148050

= $31500 x 4.28830 - $148050

= $135081 - $148050

= - $12969.

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