3. Capital Budgeting

Kravitz Company is planning to acquire a $250,000 machine to improve manufacturing efficiencies, thereby reducing annual cash operating costs (before taxes) by $80,000 for each of the next five years. The company has a minimum rate of return of 8% on all capital investments. The machine will be depreciated using straight-line method over a five-year life with no salvage value at the end of five years. Fritz is subject to a combined 40% income tax rate. Required: 1. Calculate the relevant cash flows for this investment.

2. What is the simple payback (in years) of the proposed investment?

3. What is the net present value (NPV) of the proposed investment?

4. What is the internal rate of return (IRR) of the proposed investment?