Payback Period and NPV: Taxes and Straight-Line Depreciation

Assume that United Technologies Corporation is evaluating a proposal to change the companys manual design system to a computer-aided design (CAD) system. The proposed system is expected to save 12,000 design hours per year; an operating cost savings of $65 per hour. The annual cash expenditures of operating the CAD system are estimated to be $600,000. The CAD system requires an initial investment of $200,000. The estimated life of this system is five years with no salvage value. The tax rate is 21%, and United Technologies uses straight-line depreciation for tax purposes. United Technologies has a cost of capital of 14%.

(a) Compute the annual after-tax cash flows related to the CAD project. $ _________

(b) Compute each of the following for the project:

1. Payback period. Round your answer to 2 decimal places. _______ YEARS 2. Net present value. (Round answer to the nearest whole number.) $______