Homework Answers
1. Cash inflow considering only the $65,000 in income and the tax effect on that income = Income * (1 - tax rate)
= $65,000 * (1 - 40%)
= $39,000 (D)
2. Cash flow considering income, depreciation and tax effects of both = [Income - Depreciation * (1 - tax rate)] + Depreciation
= [$65,000 - $25,000) * (1 - 40%)] + $25,000
= $49,000 (A)
3. Payback period = Investment / Cash inflows after depreciation and tax effects
= $400,000 / $49,000
= 8.16 years (C)
4. Accounting rate of return = Cash inflows after depreciation and tax effects / Investment
= $49,000 / $400,000
= 12.25% (B)
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