Walker Inc. is considering the purchase of new equipment that will automate production and thus reduce labor costs. Walker made the following estimates related to the new machinery:

Cost of the equipment .........................................$120,000

Reduced annual labor costs .....................................$40,000

Estimated life of equipment .....................................5 years

Terminal disposal value ...............................................$0

After-tax cost of capital ..............................................8%

Tax rate .................................................................25%

Required

Assume depreciation is calculated on a straight-line basis for tax purposes. Assume all cash flows occur at year-end except for initial investment amounts.

1. Calculate (a) net present value, (b) payback period, (c) discounted payback period, and (d) internal rate of return.

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