Captain Inc. is considering the purchase of new equipment that will automate production and thus reduce labor costs. Captain made the following estimates related to the new machinery:

Required

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.
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 requirement 1.

Transcribed Image Text:

Cost of the equipment Reduced annual labor costs Estimated life of equipment Terminal disposal value After-tax cost of capital Tax rate $ 128,000 $ 35,000 10 years 0 $ 8% 30%