(Appendix 2; comprehensive) Corner Publishing is evaluating the purchase of a state-of-the-art desktop publishing system that costs...
Question:
(Appendix 2; comprehensive) Corner Publishing is evaluating the purchase of a state-of-the-art desktop publishing system that costs $100,000. The company’s controller has estimated that the system will generate $32,000 of annual cash receipts for 6 years. At the end of that time, the system will have zero salvage value. The controller also has estimated that cash operating costs will be $4,000 annually. The company’s tax rate is expected to be 34 percent during the life of the asset, and the company uses straight-line depreciation.
a. Determine the annual after-tax cash flows from the project.
b. Determine the after-tax payback period for the project.
c. Determine the after-tax accounting rate of return for the project. (Assume tax and financial accounting depreciation are equal.)
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