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.
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.