QUESTIONS

Develop a capital budgeting schedule that evaluates the relative merits of replacing the old pumping system with the new one. Use the net present value method.

Suppose one of the salespersons was making a presentation to a potential customer who used the internal rate of return method in evaluating capital projects. What is the internal rate of return on this project?

Suppose you were making a presentation to a potential client who u sed the payback method in evaluating capital projects. What is the payback period $($using after$-$tax cash flows$)$ for the investment in the new pumping system?

Explain why the payback method is considered to put long $-$term investments such as pumping systems at a relative disadvantage vis$--$vis short$-$term investment project. Since SPC uses payback as its internal capital budgeting tool, what are the implications on its growth and prospects.

What is the discounted payback for the pumping system? How do you interpret this number? How might it be useful to know?

What would be the effect on net present value and on internal rate of return if accelerated depreciation, rather than straight $-$line depreciation, was used? Give the direction of change, not precise figures $.$

Suppose one of SPC$\text{'}$s potential customers had a $50$ percent marginal tax rate. Do not repeat the calculations to get a new solution but determine $($a$)$ what items would be changed and $($b$)$ whether the IRR and NPV would be raised or lowered by the shift in tax rates.