(CMA) Using alternative evaluation methods Hazman Company plans to replace an old piece of equipment that is obsolete and expected to be unreliable under the stress of daily operations. The equipment is fully depreciated and has no salvage value.

One possible replacement would provide an annual cash savings of $7,000 before income taxes. The equipment would cost $18,000 and have an estimated useful life of 5 years. The machine is expected to have no salvage value at the end of 5 years.

Hazman uses straight-line depreciation on all equipment for both book and tax purposes. The company is subject to a total income tax rate of 40 percent. Hazman has an after-tax cost of capital of 14 percent. Assume all operating revenues and expenses occur at the end of the year.

REQUIRED

a. Calculate for Hazman Company's proposed investment in new equipment the after-tax:

1. payback period.

2. accounting rate of return.

3. net present value.

4. profitability index.

5. internal rate of return.

b. Identify and discuss the issues Hazman should consider when deciding which of the five models should be used to evaluate the project.