A dental clinic is considering the possibility of replacing its X-ray equipment and buying equipment that allows the on-site, immediate preparation of crowns and bridges. Each pro¬

ject would require an investment of $150,000. The X-Ray and crown preparation equipment would each last 5 years and have no expected salvage value. The after-tax cash inflows as¬

sociated with the two independent projects are as follows:

Required:
1. Assuming a discount rate of 12%, compute the net present value of each project.
2. Compute the payback period for each project. Assume that the manager of the com¬
pany accepts only projects with a payback period of 3 years or less. Offer some reasons why this may be a rational strategy even though the NPV computed in Requirement 1 may indicate otherwise.
3. Compute the accounting rate of return for each project using average investment.

Transcribed Image Text:

Year X-Ray Equipment Crown and Bridge Equipment 12345 $75,000 $ 15,000 30,000 15,000 60,000 105,000 30,000 120,000 15,000 135,000