New equipment purchase, income taxes 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.

1.         Calculate 

 (a)    Net present value, 

 (b)    Payback period, and 

 (c)    Internal rate of return.

2.         Compare and contrast the capital budgeting methods in requirement 1.

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Relevant Cash Flows at End of Each Year 2 3 1 4 $(88,000) Initial machine investment Annual cash flow from operations (excluding the depreciation effect) $36,000 $36,000 $36,000 $36,000 Cash flow from terminal disposal of machine! $ 8,000