Question

Vernon Electronics is considering investing in manufacturing equipment expected to cost $370,000. The equipment has an estimated useful life of four years and a salvage value of $ 21,000. It is expected to produce incremental cash revenues of $185,000 per year. Vernon has an effective income tax rate of 40 percent and a desired rate of return of 14 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

   

Required

Determine the net present value and the present value index of the investment, assuming that Vernon uses straight-line depreciation for financial and income tax reporting.

Determine the net present value and the present value index of the investment, assuming that Vernon uses double-declining-balance depreciation for financial and income tax reporting.

Determine the payback period and unadjusted rate of return (use average investment), assuming that Vernon uses straight-line depreciation.

Determine the payback period and unadjusted rate of return (use average investment), assuming that Vernon uses double-declining-balance depreciation. (Note: Use average annual cash flow when computing the payback period and average annual income when determining the unadjusted rate of return.)

Answer 1