Question

1.
Determine the payback period in years for a project that costs
$42,000 and would yield after-tax cash flows of $7,000 the first
year, $9,000 the second year, $12,000 the third year, $14,000 the
fourth year, $18,000 the fifth year, and $24,000 the sixth
year.

2.
You are evaluating a potential investment in equipment. The
equipment's basic price is $126,000, and shipping costs will be
$3,800. It will cost another $18,900 to modify it for special use
by your firm, and an additional $6,300 to install it. The equipment
falls in the MACRS 3-year class that allows depreciation of 33% the
first year, 45% the second year, 15% the third year, and 7% the
fourth year. You expect to sell the equipment for 23,300 at the end
of three years. The equipment is expected to generate revenues of
$115,000 per year with annual operating costs of $61,000. The
firm's marginal tax rate is 30.0%. What is the after-tax operating
cash flow for year 2?

Answer #1

Payback period refers to the time period needed in order to recover the initial outflows for a project.

In order to determine the payback period for a project with uneven cash flows, the following steps are required:

Year | Net cash flow | Cumulative cash flow |

Y0 | (42000) |
(42000) |

Y1 | 7000 |
(35000) |

Y2 | 9000 | (26000) |

Y3 | 12000 | (14000) |

Y4 | 14000 | 0 |

Y5 | 18000 | 18000 |

Y6 | 24000 | 42000 |

In the above table, we can observe that at the end of year 4, the total initial cost has been recovered.

Thus, payback period in this case is 4 years.

Determine the payback period in years for a project that costs
$65,000 and would yield after-tax cash flows of $13,000 the first
year, $15,000 the second year, $18,000 the third year, $20,000 the
fourth year, $24,000 the fifth year, and $30,000 the sixth year.
Question 7 options: 3.95 3.33 3.73 3.20 4.16
Determine the internal rate of return for a project that costs
$298,000 and would yield after-tax cash flows of $28,000 per year
for the first 5 years, $36,000...

Determine the internal rate of return for a project that costs
-$71,500 and would yield after-tax cash flows of $11,000 the first
year, $13,000 the second year, $16,000 the third year, $18,000 the
fourth year, $22,000 the fifth year, and $28,000 the sixth
year.

Determine the net present value for a project that costs
$104,000 and would yield after-tax cash flows of $16,000 the first
year, $18,000 the second year, $21,000 the third year, $23,000 the
fourth year, $27,000 the fifth year, and $33,000 the sixth year.
Your firm's cost of capital is 12.00%. ***without use
of financial calculator***

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falls in the MACRS 3-year class that allows depreciation of 33% the
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fourth year. You expect to sell the equipment for 24,800 at...

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