Straightforward Capital Budgeting with Taxes; Sensitivity Analysis Dorothy&George Company is planning to acquire a new machine at a total cost of $30,600. The machine’s estimated life is six years and its estimated salvage value is $600. The company estimates that annual cash savings from using this machine will be $8,000. The company’s after-tax cost of capital is 8% and its income tax rate is 40%. The company uses straight-line depreciation (non-MACRS-based).
Required
1. What is this investment’s net after-tax annual cash inflow?
2. Assume that the net after-tax annual cash inflow of this investment is $5,000; what is the payback period?
3. Assume that the net after-tax annual cash inflow of this investment is $5,000; what is the net present value (NPV) of this investment?
4. What are the minimum net after-tax annual cost savings that make the proposed investment acceptable (i.e., the dollar cost savings that would yield an NPV of $0)?
(CPA Adapted)
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