Question

Bluebonnet inc is considering the purchase of new equipment that will automate production and thus reduce labor costs. Bluebonnet made the following estimates related to the new machinery.

Bluebonnet

Cost of the equipment	$ 151 comma 000$151,000
Reduced labor costs	$ 45 comma 000$45,000
Estimated life of the equipment	1010	years
Terminal disposal value	?$0
?After-tax cost of capital	88	?%
Tax rate	3535	?%

Assume depreciation is calculated on a? straight-line basis for tax purposes. Assume all cash flows occur at? year-end except for initial investment amounts.

Requirement 1. Calculate? (a) net present? value, (b) payback? period, (c) discounted payback? period, and? (d) internal rate of return.

a. Net present value. ?(Round intermediary calculations to the nearest whole dollar. Use factors to three decimal? places, X.XXX, and use a minus sign or parentheses for a negative net present value. Enter the net present value of the investment rounded to the nearest whole? dollar.)

The net present value is $

.

b.

Payback

period. ?(Round your answer to two decimal? places.)

The payback period is

years.

c.

Discounted

payback period. ?(Round interim calculations to the nearest whole dollar. Round the rate to two decimal? places, X.XX%.)

The discount payback period is

years.

d.

Internal

rate of return. ?(Round the rate to two decimal? places, X.XX%.)

The internal rate of return (IRR) is

%.

Requirement 2. Compare and contrast the capital budgeting methods in requirement 1.

Select the characteristics that describe each budgeting method. ?(If a box is not? used, leave the box? empty; do not select a? label.)

Net present value: internal rate of return Payback method (without discounting) Discounted payback method

Answer 1

Requirement:2

NPV considers time value of money an therefor discounted payback period shows 5.6 years for payback whereas Payback period is 4.37 years.