=+18-26 KKK New equipment purchase, income taxes OBJECTIVES 3, 5 Lighting Ltd is considering the purchase of a new machine that will allow it to produce LED lights. The machine has an estimated useful life of five years. The estimated pre-tax cash flows for the machine are shown in the table that follows, with no anticipated change in working capital. Lighting Ltd has a 14% after-tax required rate of return and a 30% income tax rate. Assume depreciation is calculated on a straight-line basis for tax purposes. Assume all cash flows occur at year-end except for initial investment amounts.

Initial machine investment $(150 000)

Annual before tax cash flow from operations

(excluding the depreciation effect)

rotom fo lasopsid lanimret morf wolf hsaC $ 0 1

2 3

4 5

A B C D E F 0 1 2 3 4

$45 750 $45 750 $45 750 $45 750 $45 750 Relevant cash flows at end of each year 5

Required 1 Calculate:

(a) net present value,

(b) payback period and

(c) internal rate of return.