Quintana Company plans to replace an old piece of equipment that has no book value for tax
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Quintana Company plans to replace an old piece of equipment that has no book value for tax purposes and no salvage value. The replacement equipment will provide annual cash savings of $8,000 before income taxes. The equipment costs $20,000 and will have no salvage value at the end of its five-year life. Quintana uses straight-line depreciation for both book and tax purposes. The company incurs a 40 percent marginal tax rate, and its after-tax cost of capital is 14 percent.
Compute the following performance measures for Quintana's proposed investment:
a. Payback period.
b. Payback reciprocal.
c. Accounting rate of return on average investment.
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