New equipment purchase, income taxes Innovation, Inc., is considering the purchase of a new industrial electric motor to improve efficiency at its Fremont plant. The motor has an estimated useful life of five years. The estimated pretax cash flows for the motor are shown in the table that follows, with no anticipated change in working capital. Innovation has a 10% after-tax required rate of return and a 35% income tax rate. Assume depreciation is calculated on a straight-line basis for tax purposes. Assume all cash flows occur at year-end except for initial investment amounts.

Required

1. Calculate (a) net present value, (b) payback period, (c) discounted payback period, and (d) internal rate of return.

2. Compare and contrast the capital budgeting methods in requirement1.

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Relevant Cash Flows at End of Each Year 2 3 Initial motor investment Annual cash flow from operations (excluding the depreciation effect) Cash flow from terminal disposal of motor S(75,000) $25,000 $25,000 $25,000 $25,000 $25,000