Net present value and IRR, equal cash flows (LO1, LO2, LO3, LO5). Acme Corporation is considering several ideas for expanding its scope of operations. It is planning to open an office in California to...

Net present value and IRR, equal cash flows (LO1, LO2, LO3, LO5). Acme Corporation is considering several ideas for expanding its scope of operations. It is planning to open an office in California to tap the Western market. Such an office would require an initial investment of $3.4 million and would generate cash flows (before considering tax effects) of $850,000 per year. Acme expects to depreciate the assets over an eight-year period on a straight-line basis using an assumed salvage value of $400,000.

At the end of eight years, Acme expects to sell the California office for the $400,000 estimated salvage value. Acme pays taxes at the rate of 30% of income and uses a discount rate of 10% on its capital projects.

Required:

a. Calculate the net present value (NPV) and the internal rate of return (IRR) for the California office. Based on these criteria, should Acme open the office in California?

b. What is the payback period for this project?