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PDQ Corporation is considering an investment proposal that requires an initial investment of $100,000 in equipment....

  1. PDQ Corporation is considering an investment proposal that requires an initial investment of $100,000 in equipment. Fully depreciated existing equipment may be disposed of for $30,000 pre-tax. The proposed project will have a five-year life and is expected to produce additional revenue of $45,000 per year. Expenses other than depreciation will be $12,000 per year. The new equipment will be depreciated to zero over the five-year useful life, but it is expected to actually be sold for $25,000. PDQ has a 40% tax rate.

Solutions

Expert Solution

While considering the given information, it is found out that the project is giving a net cash inflow of $72,000 during the life of the project. If the company is having no cost of capital, the project can be accepted

Calculation of pay back period of the project

Pay back period = 2 + (26,400 / 27,800) = 2.95 years

If the company is having a cost of capital, the Free cash flow has to be discounted with discounting factor of concerned year (1+r)^n where n= year, and r=cost of capital

jeff jeffy answered 1 year ago
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