Sub: Finance Topic: Capital Budgeting
Computation of Payback period, NPV and PI of project.
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Julia Corp. is in the business of making sugar cookies. The company is considering the purchase
of a new cookie making machine which will improve its manufacturing process and result in
significant cost savings. The equipment costs $250,000 and the resulting financial impact is an
after-tax cash flow savings of $60,000 in yr. 1 with this savings increasing by $10,000 annually
with the 5th year resulting in after-tax cash flow savings of $100,000. At the end of the 5th year
the machine will be sold for $10,000. Assume that the prevailing market rate of interest is 13%.
(a) What is the payback period for the proposed investment?
(b) Assume that sale of the equipment at the end of five years would net the firm 200,000,
rather than $1