Solich Company is evaluating a new tractor that costs $1,350,000 to replace the tractor purchased years earlier, which currently has no salvage value; the new tractor has an estimated useful life of five years with no disposal value or anticipated cost of disposal. For all its equipment, the company uses straight-line depreciation with no residual value. Solich is subject to a 40% income tax rate, t. The company uses a 12% hurdle rate for evaluating capital investment projects. The PV of an annuity of $1 at 12% for 5 years is 3.605, and the PV of $1 at 12% in 5 years is 0.567.
Required:
1. Compute the amount of annual before-tax savings (rounded to nearest whole number) that must be generated by the new tractor to have a payback period of 3.0 years.
2. Compute the amount of annual before-tax savings that must be generated by the new tractor to have an NPV of $500,000 at a discount rate of 12%. (Round your answer to the nearest whole dollar amount.)
3. Compute the amount of annual before-tax savings that must be generated by the new tractor to have an IRR of 12%. (Round your answer to the nearest whole dollar.)

Question

Solich Company is evaluating a new tractor that costs $1,350,000 to replace the tractor purchased years earlier, which currently has no salvage value; the new tractor has an estimated useful life of five years with no disposal value or anticipated cost of disposal. For all its equipment, the company uses straight-line depreciation with no residual value. Solich is subject to a 40% income tax rate, t. The company uses a 12% hurdle rate for evaluating capital investment projects. The PV of an annuity of $1 at 12% for 5 years is 3.605, and the PV of $1 at 12% in 5 years is 0.567. 
Required:
1. Compute the amount of annual before-tax savings (rounded to nearest whole number) that must be generated by the new tractor to have a payback period of 3.0 years.
2. Compute the amount of annual before-tax savings that must be generated by the new tractor to have an NPV of $500,000 at a discount rate of 12%. (Round your answer to the nearest whole dollar amount.)
3. Compute the amount of annual before-tax savings that must be generated by the new tractor to have an IRR of 12%. (Round your answer to the nearest whole dollar.)

Quizplus · Accepted Answer

The Answer of Solich Company is evaluating a new tractor that costs $1,350,000 to replace the tractor purchased years earlier, which currently has no salvage value; the new tractor has an estimated useful life of five years with no disposal value or anticipated cost of disposal. For all its equipment, the company uses straight-line depreciation with no residual value. Solich is subject to a 40% income tax rate, t. The company uses a 12% hurdle rate for evaluating capital investment projects. The PV of an annuity of $1 at 12% for 5 years is 3.605, and the PV of $1 at 12% in 5 years is 0.567. 
Required:
1. Compute the amount of annual before-tax savings (rounded to nearest whole number) that must be generated by the new tractor to have a payback period of 3.0 years.
2. Compute the amount of annual before-tax savings that must be generated by the new tractor to have an NPV of $500,000 at a discount rate of 12%. (Round your answer to the nearest whole dollar amount.)
3. Compute the amount of annual before-tax savings that must be generated by the new tractor to have an IRR of 12%. (Round your answer to the nearest whole dollar.)

Solich Company Is Evaluating a New Tractor That Costs $1,350,000