Alternative Project Evaluation Measures: ABC Company is considering a capital investment proposal with an initial cost of
Question:
Alternative Project Evaluation Measures: ABC Company is considering a capital investment proposal with an initial cost of $54,000. The asset is depreciated over a six-year period on the straight-line basis for both book and tax purposes. No salvage value is expected at the end of the asset life. The before-tax cash inflow for the project is $20,000 per year. The income tax rate is 40 percent, and the company's after-tax cost of capital is 15 percent.
Required: Compute the following:
a. Accounting rate of return on average investment.
b. Payback reciprocal.
c. Internal rate of return (using a calculator, computer, or trial and error and interpolation).
Choose the best answer for each of the following separate cases. All analyses are before tax.
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