Houston Inc. is considering the purchase of new equipment that will automate production and thus reduce labor costs. Houston made the following estimates related to the new machinery: Cost of the...


Houston Inc. is considering the purchase of new equipment that will automate<br>production and thus reduce labor costs. Houston made the following estimates<br>related to the new machinery:<br>Cost of the equipment<br>$146,000<br>Reduced annual labor costs<br>$45,000<br>Estimated life of equipment<br>10 years<br>Terminal disposal value<br>$0<br>After-tax cost of capital<br>8%<br>Tax rate<br>28%<br>Assume depreciation is calculated on a straight-line basis for tax purposes.<br>Assume all cash flows occur at year-end except for initial investment amounts.<br>Calculate (a) net present value, (b) payback period, (c) discounted<br>paybackperiod, and (d) internal rate of return.<br>1.<br>Compare and contrast the capital budgeting methods in<br>requirement 1.<br>2.<br>

Extracted text: Houston Inc. is considering the purchase of new equipment that will automate production and thus reduce labor costs. Houston made the following estimates related to the new machinery: Cost of the equipment $146,000 Reduced annual labor costs $45,000 Estimated life of equipment 10 years Terminal disposal value $0 After-tax cost of capital 8% Tax rate 28% 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. Calculate (a) net present value, (b) payback period, (c) discounted paybackperiod, and (d) internal rate of return. 1. Compare and contrast the capital budgeting methods in requirement 1. 2.

Jun 09, 2022
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