Anna's Bakery plans to purchase a new oven for its store. The oven has an estimated useful life of 4 years. The estimated pretax cash flows for the oven are as shown in the table that follows, with no anticipated 

change in working capital. Anna's Bakery has a 12% after-tax required rate of return and a 40% income tax rate. Assume depreciation is calculated on a straight-line basis for tax purposes using the initial oven 

investment and estimated terminal disposal value of the oven. Assume all cash flows occur at year-end except for initial investment amounts. Equipment is subject to 20% CCA rate declining balance for income tax purposes.

 

Relevant cash flow at end of each year-----0 1 2 3 4

Initial machine investment (88,000)

Annual cash flow from operations 36,000 36,000 36,000 36,000

(excluding the depreciation effect)

Cash flow from terminal disposal of motor 8,000

1) Calculate the payback period and internal rate of return using the calculator BA II plus no annuity tables allowed.

 

2) Compare and contract the capital budgeting methods in requirement.

Answer rating: 100% (QA)

Answer To calculate the payback period and internal rate of return IRR for the oven investment we ne... View the full answer