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PART 2. Problems (50 points). Problem 1 (25 points). A company is considering the purchase of equipment which will have the following cash revenues and
PART 2. Problems (50 points). Problem 1 (25 points). A company is considering the purchase of equipment which will have the following cash revenues and cash expenses over the next seven years. Year 1 S 2 3 Cash Revenues 350.000 400,000 400,000 450,000 475,000 500,000 450,000 Cash Expenses 250,000 300,000 320,000 340,000 360,000 390,000 325,000 4 5 6 7 The equipment will cost $560,000 and has no expected salvage value at the end of its useful life. The company uses straight line depreciation to depreciate these types of assets. The company requires a 14% before tax rate of return on its investments and a 10% after tax rate of return on its investments. The company's income tax rate is 25%. The company also wants its investments to have a before tax payback period of 5.75 years or less and an after tax payback period of 6.25 years or less. REQUIRED: (1) (2) (3) (4) Calculate the after tax accounting rate of return for this equipment. Calculate the before tax payback period for this equipment. Calculate the after tax net present value for this equipment. Should the company purchase this equipment? Explain your answer fully. 10
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