Solution-Calculate payback period of investment to nearest

Calculate payback period of investment to nearest month

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Reference no: EM132587322

Tango associates is evaluating a capital investment proposal for a new product for the current year. The initial investment would require the firm to spend $47,000 on new equipment which would be depreciated on a straightline basis over five years with $6,000 salvage value.

The firm's accountant has estimated the before-tax annual cash inflow from the investment to be $35,000 and outflows of $20,000. To run this project, Tango has to invest $7,000 of working capital which is returned at the end of the project's life. The income tax rate is 10 percent, and all taxes are paid in the year that the related cash flows occur. The desired after-tax rate of return is 15 percent. Tango usually wants their investment paid back in 3 years. All cash flows occur at year's end.

Required:

Question a. What is the net present value of the capital investment? Should they invest according to NPV?

Question b. What is the Internal Rate of Return of the capital investment? Should they invest according to IRR?

Question c. Calculate the Payback Period of this investment to the nearest month. Should they invest according to PBP?

Reference no: EM132587322

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Calculate payback period of investment to nearest month

Reference no: EM132587322

Reference no: EM132587322

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