P12-31.Payback Period and NPV: Taxes and Straight-Line Depreciation

Assume that United Technologies Corporationis evaluating a proposal to change the company's

manual design system to a computer-aided design (CAD) system.The proposed system is expected

to save 13,500 design hours per year; an operating cost savings of $55 per hour.The annual cash ex-

penditures of operating the CAD system are estimated to be $300,000. The CAD system requires an

initial investment of $750,000. The estimated life of this system is five years with no salvage value.

The tax rate is 35 percent, and United Technologies uses straight-line depreciation for tax purposes.

United Technologies has a cost of capital of 14 percent.

Required:

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

b.Compute each of the following for the project:

1.Paybackperiod.

2.Net present value.