A salad oil bottling plant can either buy caps for the glass bottles at $0.05 each or install $500,000 worth of plastic molding equipment and manafacture the caps at the plant. The manufacturing engineer estimates the material, labor, and other costs would be $0.03 per cap.
a) If 12 million caps per year are needed and the molding equipment is installed, what is the payback period?
b) The plastic molding equipment would be depreciated by straight-line depreciation using a 5-year useful life and no salvage value. Assuming a combined 40% income tax rate, what is the after-tax payback period, and what is the after-tax rate of return?
Please include detailed work.
A salad oil bottling plant can either buy caps for the glass bottles at $0.05 each or install $500,000 worth of plastic molding equipment and manafacture the caps at the plant. The manufacturing engineer estimates the material, labor, and other costs would be $0.03 per cap.
a) If 12 million caps per year are needed and the molding equipment is installed, what is the payback period?
b) The plastic molding equipment would be depreciated by straight-line depreciation using a 5-year useful life and no salvage value. Assuming a combined 40% income tax rate, what is the after-tax payback period, and what is the after-tax rate of return?
Please include detailed work.
Related questions
A box fabricator can either buy plastic straps for its Tufdutiâ crates at 6¢ each or install $700,000 worth of strapping equipment and manufacture the straps at their facility. Their technologist estimates the material, labor, and other costs would be 3¢ per strap.
(a) If 10 million straps per year are needed and the equipment is installed, what is the payback period?
Answer:
Reasoning/Work:
(b) The equipment would be depreciated by straight-line depreciation using a 5-year useful life and no salvage value. Assuming a combined 40% income tax rate, what is the after-tax payback period?
To assist you, fill in the table below and use the ATCF for years 1-5 to calculate the payback period.
| Year | BTCF | SL Depreciation | Taxable Income | Income Taxes@ 40% | ATCF |
| 0 | leave blank | leave blank | leave blank | ||
| 1-5 |
Answer:
Reasoning/Work:
c) Again, assuming a 5 yr SL depreciation w/ no salvage and a combined 40% income tax rate, what is the after-tax rate of return?
Answer:
Reasoning/Work:
