Annaâs Bakery plans to purchase a new oven with an estimated useful life of four years. The estimated pretax cash flows for the oven are as shown in the table that follows, with no anticipated change in working capital. Annaâs Bakery has a 12% after-tax required rate of return and a 40% income tax rate. Assume depreciation is calculated on a straight-line basis for accounting purposes using the initial oven investment and estimated terminal disposal value of the oven. Assume all cash flows occur at year-end except for initial investment amounts. Equipment is subject to 20% CCA rate declining balance for income tax purposes.
Required: 1. Calculate (a) net present value, (b) payback period, and (c) internal rate of return. 2. Compare and contrast the capital budgeting methods in requirement 1.
Relevant Cash Flows at End of Each Year 0 1 2 3 4 Initial machine investment $(88,000) Annual cash flow from operations (excluding the depreciation effect) $36,000 $36,000 $36,000 $36,000 Cash flow from terminal disposal of motor