A salad oil bottling plant can either purchase caps for the glass bottles at 5 cents each

Question:

A salad oil bottling plant can either purchase caps for the glass bottles at 5 cents each or install $500,000 worth of plastic molding equipment and manufacture the caps at the plant. The manufacturing engineer estimates the material, labor, and other costs would be 3 cents per cap.

(a) If 12 million caps per year are needed and the molding equipment is installed, what is the payback period?

(b) The plastic molding equipment would be depreciated by straight-line depreciation using a 5-year useful life and no salvage value. Assuming a 40% income tax rate, what is the after-tax payback period, and what is the after-tax rate of return?

Depreciation
Depreciation is an important concept in accounting. By definition, depreciation is the wear and tear in the value of a noncurrent asset over its useful life. In simple words, depreciation is the cost of operating a noncurrent asset producing... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...