The management of WYT Bank is considering an investment in automatic teller machines. The machines would cost RM124,200 and have a useful life of seven years. The banks controller has estimated that the automatic teller machines will save the bank RM27,000 after taxes during each year of their life (including the depreciation tax shield). The machines will have no salvage value.

Required:

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

(3 marks)

(b) Calculate the net present value of the proposed investment assuming an after-tax hurdle rate of:

i. 10%.

(7 marks)

ii. 12%

(7 marks)

(c) Explain the effect of a depreciation tax shield in a capital budgeting analysis.

(3 marks)