Effect of capital structure on companies value per

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Reference no: EM13356968

Effect of capital structure on companies value per share.

After-tax cash flows: payback NPV; PI; IRR

Fabulous Fashions is considering the purchase of computerized clothes designing software. The software is expected to cost$160,000, have a useful life of five years, and have zero salvage value at the end of its useful life. Assume tax regulations permit the following depreciation patterns for this asset:

Year

Percent Deductible

1

20

2

32

3

19

4

15

5

14

The company's tax rate is 30 percent and its cost of capital is 8 percent. The software is expected to generate cash savings and cash expenses:

Year

Cash Savings

Cash Expenses

1

$61,000

$9,000

2

67,000

8,000

3

72,000

13,000

4

60,000

9,000

5

48,000

5,000

a. Prepare a time line presenting the after-tax operating cash flows
b. Determine the following on an after-tax basis; payback period, net present value, profitability index and internal rate of return.

Reference no: EM13356968

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