Assume that United Technologies Corporation is evaluating a proposal to change the companys manual design system to a computer aided design (CAD) system. The proposed system is expected to save 9,000 design hours per year; an operating cost savings of $45 per hour. The annual cash expenditures of operating the CAD system are estimated to be $200,000. The CAD system requires an initial investment of $550,000. The estimated life of this system is five years with no

salvage value. The tax rate is 35%, and United Technologies uses straight-line depreciation for tax purposes. United Technologies has a cost of capital of 14%.

REQUIRED

a. Compute the annual after-tax cash flows related to the CAD Project.

b. Compute each of the following for the project:

1. Payback period

2. Net present value