Effects of straight-line versus accelerated depreciation on an investment decision American Pipe Company decided to spend $80,000 to purchase new state-of-the-art equipment for its manufacturing plant. The equipment has a five-year useful life and a salvage value of $20,000. It is expected to generate additional cash revenue of $32,000 per year. American Pipe’s required rate of return is 10 percent; its effective income tax rate is 25 percent.

Required

a. Determine the net present value and the present value index of the investment, assuming that American Pipe uses straight-line depreciation for financial and income tax reporting.

b. Determine the net present value and the present value index of the investment, assuming that American Pipe uses double-declining-balance depreciation for financial and income tax reporting.

c. Why are there differences in the net present values computed in Requirements a and b?

d. Determine the payback period and unadjusted rate of return (use average investment), assuming that American Pipe uses straight-line depreciation.

e. Determine the payback period and unadjusted rate of return (use average investment), assuming that American Pipe uses double-declining-balance depreciation. (Note: Use average annual cash flow when computing the payback period and average annual income when computing the unadjusted rate of return.)

f. Why are there no differences in the payback period or unadjusted rate of return computed in Requirements d and e?