Short Company is planning to purchase equipment costing $70,000 to use in their Cooking Department. Management estimates that the life of the machine will be 10 years, and depreciation for tax purposes for Year 1 is $5,600. The company estimates the first year’s cash savings from using this machine will be $20,000. The company’s income tax rate is 48 percent.

Required:

a. Calculate the annual aftertax net cash benefits of this machine for Year 1.

b. Suppose the annual aftertax cash benefits of this machine were $13,500 for each of the years of its life, what would the net present value of this investment be, assuming the company’s cost of capital is 12 percent?

c. Assuming the annual aftertax cash benefits of this machine were $13,500, what would the payback period be?

d. Suppose the useful life should be seven years and annual aftertax net cash benefits are $13,500. What is the cost of estimation error if there are no alternative investments and the machine is purchased based on the original 10-year estimate?