Canadian Classics manufactures parts for classic automobiles. The CFO is considering the purchase of a two-ton press,

Question:

Canadian Classics manufactures parts for classic automobiles. The CFO is considering the purchase of a two-ton press, which will allow the firm to stamp auto fenders. The equipment costs $250,000. The project is expected to produce after-tax cash flows of $80,000 per year. Liquidating the equipment will net the firm $10,000 in cash at the end of five years. The firm requires a 15% rate of return on all investments. The firm’s tax rate is 38%. Ignore the effects of CCA.

a. What is the payback period for the proposed investment?

b. What would happen to the payback period if the sale of the equipment at the end of five years nets the firm $200,000, rather than $10,000?

c. What is the project’s discounted payback period?

d. What is the project’s net present value?

e. What is the project’s profitability index?

f. What is the project’s internal rate of return?

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...