Bakery plans to purchase a new oven for its store. The oven has an estimated useful life of 4 years. The estimated pretax cash flows for the oven are as shown in the table that follows, with no anticipated change in working capital. The bakery has 10% after-tax required rate of return and a 38 % income tax rate. Equipment is subject to a 20% CCA rate declining balance for income tax purposes.

Assume depreciation is calculated on a straight-line basis for accounting purposes using the initial investment in the oven and its estimated terminal disposal value. Assume all cash flows occur at year-end except for initial investment amounts.

Estimated cash flows

	Relevant Cash Flows at End of Each Year
	0	1	2	3	4
Initial oven investment	$(201,000)
Annual cash flows from operations
(excluding the depreciation effect)		$79,000	$79,000	$79,000	$79,000
Cash flow from terminal disposal of oven					$0

REQUIRED:

1.	Calculate (a) net present value, (b) payback period, and (c) internal rate of return.
2.	Compare and contrast the capital budgeting methods in requirement 1.

Requirement 1a. Calculate the net present value. (Use factors to three decimal places, X.XXX, and use a minus sign or parentheses for a negative net present value. Enter the net present value of the investment rounded to the nearest whole dollar.)

The net present value is $

.

Part 2

Requirement 1b. Calculate the payback period. (Round your answer to two decimal places.)

The payback period is

years.

Part 3

Requirement 1c. Calculate the internal rate of return. (Round your answer to two decimal places.)

The internal rate of return is __________

Part 4

Requirement 2. Compare and contrast the capital budgeting methods in requirement 1.

Both the

net present value and payback

internal rate of return and payback

net present value and internal rate of return

methods use a discounted cash flow approach in which

all

none

some

of a project's expected future cash inflows and outflows are measured as if they occurred at a single point. The

payback

net present value

internal rate of return

method considers cash flows only up to the time when the expected future cash inflows recoup the net initial investment and it ignores profitability and the time value of money.