=+18-21 KK Capital budgeting with uneven cash flows, no income taxes OBJECTIVES 1, 3, 5, 6 Eumundi Engines is considering a diagnostic computer at a cost of $19000. It is expected to have a useful life of five years with no terminal disposal value. The shop manager estimates the following savings in cash operating costs:

Chapter 18: Capital budgeting and cost analysis 717 M18_HORN3377_02_LT_C18.indd 717 2/09/13 4:03 PM Year Amount 1 $4 000 2 4 000 3 4 000 4 4 500 5 4 500 Total $21 000 Eumundi Engines uses a required rate of return of 10% in its capital budgeting decisions. Ignore income taxes in your analysis.

Assume all cash flows occur at year-end except for initial investment amounts. The shop manager is certain that the computer is a worthwhile investment since the savings are greater than the cost.

Required Calculate the following for the diagnostic computer and explain the results to the shop manager:

1 net present value 2 payback period