Jeff's Auto Repair is looking at making an investment of $732,000 in new machinery. They expect to generate the following Earnings Before Amortization and Taxes as well as the following positive, after-tax cash flows: Cash flows Year Earnings before amortization & taxes (after tax) $ 197,000 $174,500 2 232,000 199,000 3 276,000 229,800 4 209,000 182,900 5 247,000 209,500 6 229,000 196,900 (a) Required: Compute the Average Accounting Return assuming the asset will be fully depreciated over the six-year time period, using straight-line depreciation, and Jeff's Auto Repair has a 30 percent tax rate. (Round your answer to two decimal places (e.g. 12.34%)) (b) Compute the payback period in years, and the internal rate of return for the project (c) Compute net present value of the project if WACC is 11 percent. (d) Should the project be undertaken, and why?
Jeff's Auto Repair is looking at making an investment of $732,000 in new machinery. They expect to generate the following Earnings Before Amortization and Taxes as well as the following positive, after-tax cash flows: Cash flows Year Earnings before amortization & taxes (after tax) $ 197,000 $174,500 2 232,000 199,000 3 276,000 229,800 4 209,000 182,900 5 247,000 209,500 6 229,000 196,900 (a) Required: Compute the Average Accounting Return assuming the asset will be fully depreciated over the six-year time period, using straight-line depreciation, and Jeff's Auto Repair has a 30 percent tax rate. (Round your answer to two decimal places (e.g. 12.34%)) (b) Compute the payback period in years, and the internal rate of return for the project (c) Compute net present value of the project if WACC is 11 percent. (d) Should the project be undertaken, and why?
Chapter11: Capital Budgeting Decisions
Section: Chapter Questions
Problem 1PA: Your company is planning to purchase a new log splitter for is lawn and garden business. The new...
Related questions
Question
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 6 steps with 6 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College