Question
Merryll, Inc., is considering three different investments involving depreciable assets with no salvage value. The following data relate to these investments: The income tax rate
Merryll, Inc., is considering three different investments involving depreciable assets with no salvage value. The following data relate to these investments: The income tax rate is 40%. Management requires a minimum return on investment of 12%. Rank these proposals using the following selection techniques: a. Payback period. b. Unadjusted rate of return. c. Profitability index. d. Time-adjusted rate of return.
investment Initial cash outlay Expected before tax Expected after tax life of proposal
initial cash inflow/year initial cash inflow/ year (years)
1 140,000 37,333 28,000 10
2 240,000 72,000 48,000 20
3 360,000 89,333 68,000 10
The income tax rate is 40%. Management requires a minimum return on investment of 12%.
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