Vector is a profitable company. The income tax rate is 40% of operating income each year.

The before-tax additional operating cash inflows from the hybrid bus are $220,000 in years 1-4 and $170,000 in year 5.

For tax purposes, Vector uses the straight-line depreciation method and assumes there is no terminal disposal value of the bus at the end of the 5^th year.

Gins or losses on the sale of the assets are taxed at the same rate as ordinary income.

The tax effects of cash inflows and outflows occur at the same time that the cash inflows and outflows occur.

Vector uses an 8% required rate of return for discounting after-tax cash flows.

The purchase price of the new hybrid bus is $660,000.

There is an extra working capital related to the purchase of the new hybrid bus, which is $30,000. At the end of the project, the working capital will be liquidated, resulting in a cash inflow.

Due to the purchase of the new hybrid bus, there is an extra depreciation expense in the amount of $120,000.

If Vector purchases the new hybrid bus, it can sell its current old bus. The current book value of the old bus is $60,000 while the current disposal value to sell is $28,500.

Requirements:

What is the net initial investment?

What is the cash flow from operations?

What is the terminal disposal of investment?

What is the IRR of this project?

What is the payback period/ What is the discounted payback period?

What is the AARR?

What is the NPV? Should the company invest in this project?

Other factors to consider (other than NPV) for the decision making?