The management of Iroquois National Bank is considering an investment in automatic teller machines. The machines would cost $124,200 and have a useful life of seven years. The bank’s controller has estimated that the automatic teller machines will save the bank $27,000 after taxes during each year of their life (including the depreciation tax shield). The machines will have no salvage value.

Required:

1. Compute the payback period for the proposed investment.

2. Compute the net present value of the proposed investment assuming an after-tax hurdle rate of:

(a) 10 percent,

(b) 12 percent,

(c) 14 percent.

3. What can you conclude from your answers to requirements (1) and (2) about the limitations of the payback method?

4. Build a spreadsheet: Construct an Excel spreadsheet to solve requirements (1) and (2) above. Show how the solution will change if the following information changes: the machines would cost $134,400, and the annual savings amount to $28,000.