Tax incentives and capital budgeting Benboola Company plans to buy a machine costing $140,000 that has a 8-year useful life and a salvage value of $20,000. The company plans to acquire the machine during the first quarter of the year. Expected annual revenues and expenses from the machine are $100,000 and $60,000 respectively, not including depreciation. The machine will be put into service at the beginning of 1992. The company uses MACRS 5-year depreciation for tax purposes and straight-line depreciation for accounting purposes. Its cost of capital is 15 percent and its combined federal and state income tax rate is 45 percent. The company accepts projects with a positive net present value only if their payback period is less than 5 years.

Transcribed Image Text:

REQUIRED a. Find the after-tax net present value of the investment based on the accelerated cost recovery system. b. Compute the profitability index. c. Compute the payback period. d. Decide whether the investment should be made.