Cost Management: A Strategic Emphasis 7th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins

Exercise 31

Capital Budgeting with Tax (Non-MACRS Depreciation) and Sensitivity Analysis Gravina Company is planning to spend $6,000 for a machine that it will depreciate on a straight-line basis over 10 years with no salvage value. The machine will generate additional cash revenues of $1,200 a year. Gravina will incur no additional costs except for depreciation. Its income tax rate is 35%.
Required
1. What is the payback period of the proposed investment under the assumption that the cash inflows occur evenly throughout the year
2. What is the accounting (book) rate of return (ARR) based on the initial investment outlay
3. What is the maximum amount that Gravina Company should invest if it desires to earn an internal rate of return (IRR) of 15%
4. What is the minimum annual (pretax) cash revenue required for the project to earn a 15% internal rate of return
5. Prepare a single schedule to show the NPVs associated with a 10-year life under annual after-tax cash flows of $500, $1,000, and $2,000 and discount rates of 10%, 15%, and 20%.
(CPA Adapted)