The Huron Development Company is considering buying an overhead pulley system. The new system has a purchase price of $ 100,000, an estimated useful life and MACRS class life of five years, and an estimated salvage value of $30,000. It is expected to allow the company to economize on electric power usage, labor, and repair costs, as well as to reduce the number of defective products. A total annual savings of $45,000 will be realized if the new pulley system is installed. The company is in the 30% marginal tax bracket. The initial investment will be financed with 40% equity and 60% debt. The before-tax debt interest rate, which combines both short-term and long-term financing, is 15% with the loan to be repaid in equal annual installments over the project life. The equity interest rate (/,,), which combines the two sources of common and preferred stocks, is 20%.
(a) Evaluate this investment project by using net equity flows.
(b) Evaluate this investment project by using k.