Payback Period and NPV: Taxes and Straight-Line Depreciation

Assume that United Technologies Corporation is 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 expenditures 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.

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

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

1. Payback period. Round your answer to 2 decimal places.

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years

2. Net present value. (Round answer to the nearest whole number.)

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