Lorax Corporation is considering the acquisition of a new machine that is expected to produce annual savings in cash operating costs of $30,000 before income taxes. The machine costs $100,000, has a useful life of five years, and no salvage value. Lorax uses straight-line depreciation on all assets, is subject to a 30% income tax rate, and has an after-tax hurdle rate of 8%.
Required:
A. Compute the machine's payback period.
B. Compute the machine's accounting rate of return on the initial investment.
C. Compute the machine's net present value.

Question

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The Answer of Lorax Corporation is considering the acquisition of a new machine that is expected to produce annual savings in cash operating costs of $30,000 before income taxes. The machine costs $100,000, has a useful life of five years, and no salvage value. Lorax uses straight-line depreciation on all assets, is subject to a 30% income tax rate, and has an after-tax hurdle rate of 8%.
Required:
A. Compute the machine's payback period.
B. Compute the machine's accounting rate of return on the initial investment.
C. Compute the machine's net present value.

Lorax Corporation Is Considering the Acquisition of a New Machine