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MCS,PHD
Argosy University/ Phoniex University/
Nov-2005 - Oct-2011
Professor
Phoniex University
Oct-2001 - Nov-2016
(After-tax cash flows; payback; NPV; PI; IRR) Forester Fashions is conside ring the purchase of computerized clothes-designing software. The software is expected to cost $320,000, have a useful life of 5 years, and have no salvage value at the end of its useful life. Assume that tax regulations permit the following depreciation patterns for this software:
|
Year |
Percent Deductible |
|
1 |
20 |
|
2 |
32 |
|
3 |
19 |
|
4 |
15 |
|
5 |
14 |
The company’s tax rate is 35 percent, and its cost of capital is 8 percent. The software is expected to generate the following cash savings and cash expenses:
|
Year |
Cash Savings |
Cash Expenses |
|
1 |
$122,000 |
$18,000 |
|
2 |
134,000 |
16,000 |
|
3 |
144,000 |
26,000 |
|
4 |
120,000 |
18,000 |
|
5 |
96,000 |
10,000 |
a. Prepare a time line presenting the after-tax operating cash flows.
b. Determine the following on an after-tax basis: payback period, net present value, profitability index, and internal rate of return.
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