Capital Budgeting - ABC Manufacturing desires to buy a new piece of equipment to manufacture Bobblehead Dolls for the baseball season this summer. The machine costs $90,000 and costs $20,000 to install. The Coronavirus pandemic has taught them a lesson and decided against using a just-in-time inventory system. They realized that is good for big companies but they are a small business. Because of the purchase of the equipment, an additional $6,000 of inventory will be necessary. Its estimated useful life is eight years and it will have a salvage value of $8,000. Annual cash savings from the purchase of the machine will be $29,000. The company uses straight-line depreciation and pays taxes at 21%. They use a discount rate of 12%. They have an income tax rate of 21% and according to the IRS, this asset has a 3-year life and no salvage value (according to IRS).

Required:

1. Prepare a timeline for the investment.

2. Determine the payback period of the investment. The payback threshold is 4 years.

3. Compute the net present value at a 12% required rate of return.

4. Compute the profitability index.

5. What is the internal rate of return?

6. Determine the payback period of the investment if the payback threshold is 5 years.

7. Which of the Methods would you recommend?