Impass Limited is considering the acquisition of a new machine that costs $402,000. The machine is expected to have a six-year service life and will produce annual savings in cash operating costs of $75,000. Impass uses straight-line depreciation, is subject to a 23% income tax rate, has an after-tax hurdle rate of 10%, and rounds calculations to the nearest dollar.
Required:
A. Determine the annual after-tax cash flows that result from acquisition of the machine.
B. Assuming that your answer in requirement "A" totalled $98,470, calculate the machine's:
1. Net present value. Is the machine an attractive investment? Why?
2. Internal rate of return. Is the machine an attractive investment? Why?
3. Payback period.

Question

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The Answer of Impass Limited is considering the acquisition of a new machine that costs $402,000. The machine is expected to have a six-year service life and will produce annual savings in cash operating costs of $75,000. Impass uses straight-line depreciation, is subject to a 23% income tax rate, has an after-tax hurdle rate of 10%, and rounds calculations to the nearest dollar.
Required:
A. Determine the annual after-tax cash flows that result from acquisition of the machine.
B. Assuming that your answer in requirement "A" totalled $98,470, calculate the machine's:
1. Net present value. Is the machine an attractive investment? Why?
2. Internal rate of return. Is the machine an attractive investment? Why?
3. Payback period.

Impass Limited Is Considering the Acquisition of a New Machine