Lyle Company is considering whether to enter into a franchise agreement that would give the company exclusive distribution rights in a three-state region to a quality line of leisure spas. The franchise agreement will extend eight years and cost \($600,000.\) There is no salvage value. The franchise cost will be amortized on a straight-line basis over eight years on both the books and the tax return. The following annual results are expected if the franchise is acquired:

Lyle uses a 12% cutoff rate when analyzing capital expenditure proposals using net present value.
Required

a. What are the annual net cash flows (net inflows) from this proposal?

b. Compute the cash payback period.

c. Compute the average rate of return.

d. Compute the net present value and indicate whether it is positive or negative.

e. Assume that Lyle decides to use a 10% cutoff rate when using net present value analysis. Compute the net present value using a 10% cutoff rate and indicate whether it is positive or negative.

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Increase in annual cash revenue. Increase in expenses: Cash operating expenses. Amortization $95,000 75,000 Pretax income Income tax expense (35%). Net income... $230,000 170,000 $ 60,000 21,000 $ 39,000