(Ignore income taxes in this problem.) Hinck Corporation is investigating automating a process by purchasing a new machine for $520,000 that would have an eight-year useful life and no salvage value. By automating the process, the company would save $134,000 per year in cash operating costs. The company's current equipment would be sold for scrap now, yielding $22,000. The annual depreciation on the new machine would be $65,000.

Required:

What's the simple rate of return on the investment to the nearest tenth of a percent?

$520,000 new machine - $22,000 scrap = $498,000

($134,000 - $65,000)/$498,000 = 13.9%

Question 17:

(Ignore income taxes in this problem.) Schaad Corporation has entered into an eight-year lease for a piece of equipment. The annual payment under the lease will be $2,500, with payments being made at the beginning of each year.

Brodigan Corporation has provided the following information concerning a capital budgeting project:

Investment required in equipment $450,000

Net annual operating cash inflow $220,000

Tax rate 30%

After-tax discount rate 12%

The expected life of the project and the equipment is three years, and the equipment has zero salvage value. The company uses straight-line depreciation on all equipment, and the depreciation expense on the equipment would be $150,000 per year. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting. The net annual operating cash inflow is the difference between the incremental sales revenue and incremental cash operating expenses.

What is the net present value of the project? (ignore taxes)