New Frontiers, Inc., is considering the purchase of a new industrial electric motor to improve efficiency at

Question:

New Frontiers, Inc., is considering the purchase of a new industrial electric motor to improve efficiency at its Chico plant. The motor has an esti-mated useful life of 5 years. The estimated pretax cash flows for the motor are shown in the table that follows, with no anticipated change in working capital. New Frontiers has an 8% after- tax required rate of return and a 30% 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,

(d) Internal rate of return.

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

New Frontiers, Inc., is considering the purchase of a new

Net Present Value
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