Problem $2$

A salad oil bottling plant can either buy caps for the glass bottles at $6$ cents each, or install $$700,000$

worth of plastic moulding equipment and manufacture the caps at the plant. The manufacturing

engineer estimates that the material, labour, and other costs would be $4\mathrm{.}5$ cents per cap.

$($a$)$ If $12$ million caps per year are needed and the moulding equipment is installed, what is the

payback period? $($Round to one decimal place, e$.$g$.9\mathrm{.}7$ years.$)$

$($b$)$ Assume that the plastic moulding equipment can be depreciated by straight$-$line depreciation,

will have a five$-$year useful life, and will have no salvage value. If this method were allowed

under tax law, assuming a $40\%$ income tax rate, what is the after$-$tax payback period? $($Apply

the same rounding as above.$)$

$($c$)$ What is the after$-$tax rate of return $($IRR$)($rounded to the nearest tenth of a percent$)?$