Introduction to Finance

11. 
Use the information in Problem 10 to do the following:
a. 
Calculate the payback period for the machine.
b. 
If the project’s cost of capital is 10 percent, would you recom-
mend buying the machine?
c. 
Estimate the IRR for the machine.
12. 
The Brassy Fin Pet Shop is considering an expansion. Construc-
tion will cost $90,000 and will be depreciated to zero, using straight-
line depreciation, over fi ve years. Earnings before depreciation are 
expected to be $20,000 in each of the next fi ve years. The fi rm’s tax 
rate is 34 percent.
a. 
What are the project’s cash fl ows?
b. 
Should the project be undertaken if the fi rm’s cost of capital is 
11 percent?
13. 
The following is a simplifi ed project annual income statement 
for Ma & Pa Incorporated for each year of an eight-year project. Its 
up-front cost is $2,000. Its cost of capital is 12 percent.
Sales $925.00
less cash expenses 
310.00
less depreciation 
250.00
Earnings before taxes 
$365.00
Less taxes (at 35%) 
127.75
Net income 
$237.25
a. 
Compute the project’s after-tax cash fl ow.
b. 
Compute and interpret the project’s NPV, IRR, profi tability index, 
and payback period.
14. 
Challenge Problem
Annual savings from project X include a 
reduction of ten clerical employees with annual salaries of $15,000 
each, $8,000 from reduced production delays, $12,000 from lost 
sales due to inventory stock-outs, and $3,000 in reduced utility costs. 
Project X costs $250,000 and will be depreciated over a fi ve-year 
period using straight-line depreciation. Incremental expenses of the 
system include two new operators with annual salaries of $40,000 
each and operating expenses of $12,000 per year. The fi rm’s tax rate 
is 34 percent.