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Straightforward Capital Budgeting with Taxes; Sensitivity Analysis Dorothy & George Company is planning to acquire a new machine at a total cost of $30,600. The machine's estimated life is six years and its estimated salvage value is $600. The company estimates that annual cash savings from using this machine will be $8,000. The company's after-tax cost of capital is 8 percent and its income tax rate is 40 percent. The company uses straight-line depreciation (non-MACRS-based).
Required:
1. What is this investment's net after-tax annual cash inflow?
2. Assume that the net after-tax annual cash inflow of this investment is $5,000; what is the payback period?
3. Assume that the net after-tax annual cash inflow of this investment is $5,000; what is the net present value (NPV) of this investment?
4. What are the minimum net after-tax annual cost savings that make the proposed investment acceptable (i.e., the dollar cost savings that would yield a NPV of $0)?
The project would generate before tax annual cash inflows of $28,500. The tax rate is 35% and the company’s discount rate is 14%. What is the annual accounting income?
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Week 5 Key Concept Exercise Budgeting and financing the organisation Print Page This week's Key Concept Exercise is intended to get you thinking about the use of budgeting in an organisation. There are many different types of budgets. This week, you ..
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