The management of Niagara National Bank is considering an investment in automatic teller machines. The machines would cost $169,200 and have a useful life of seven years. The banks controller has estimated that the automatic teller machines will save the bank $36,000 after taxes during each year of their life (including the depreciation tax shield). The machines will have no salvage value.

a. Compute the payback period for the proposed investment. (years)

b.Compute the net present value of the proposed investment assuming an after-tax hurdle rate of (a) 10 percent, (b) 12 percent, and (c) 14 percent.

c.

Which of the following statements are true?

The payback period criterion fails to account for the time value of money.unanswered

The analyst can adjust for risk considerations using payback method while evaluating proposals.unanswered

The payback method is preferable to the net-present-value method.unanswered

If management uses the payback method, the investment will be approved only if the required payback period meets or exceeds the years calculated.unanswered

The cut-off value for the payback period has nothing to do with the bank's hurdle rate.