Tanner 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. Tanner 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 accounting rate of return on the initial investment.
B. Compute the machine's net present value.

Question

Tanner 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. Tanner 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 accounting rate of return on the initial investment.
B. Compute the machine's net present value.

Quizplus · Accepted Answer

The Answer of Tanner 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. Tanner 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 accounting rate of return on the initial investment.
B. Compute the machine's net present value.

Tanner Corporation Is Considering the Acquisition of a New Machine