Rent-to-Own Equipment Co. is considering a new product line that requires new ma

Question

Rent-to-Own Equipment Co. is considering a new product line that requires new manufacturing equipment that will cost $750,000, including installation costs. The line is expected to generate incremental revenue over the next four years in the amounts of $400,000 each year. It will incur incremental costs of $100,000 per year. The equipment will be depreciated using straight line depreciation. The tax rate is 30%. Rent-to-Own's required rate of return is 8%. a) What is the after tax cash flow for this project: a) What is the payback period of this project? b) What is the NPV of this project? c) What is the internal rate of return of this project? d) Should Rent-to-Own install the equipment to implement the new product line?

Explanation / Answer

Hi, If you like my answer rate me first...that way only I can earn points. Thanks Each year: Revenue =400000 Expense = 100000 Depreciation = 750000 /4 = 187500 Income = 112500 After Tax income = 78750 After Tax cash flow = 78750 + 187500 = 266250 Payback period = 1 + (400000 - 266250) / 266250 = 2.498 years NPV = -$750000 + $266250/1.08 + .. + 266250/1.08^4 = $ 4,81,853.77 IRR = 55% Yes, Rent-to-Own should install the equipment to implement the new product line

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