The management team at Piper Ltd is evaluating a proposal to overhaul its production methods company wide. Important details concerning this proposal is provided below:

  • The initial cost of the equipment will be $25 million. This cost will be depreciated using the straight-line method over the 10-year life of the upgrade.
  • Staff will need to be retrained to use the new equipment. This is expected to cost $500,000.
  • Existing equipment will need to be removed and disposed of at a cost of $750,000.
  • The new equipment will also enable the firm to offer the leading eye test accuracy and detail on the market. Collectively, this is expected to increase the firm’s revenues by $3 million in year 1. This will increase by 2% p.a.
  • The new equipment is expected to save the firm $500,000 in operating costs p.a.
  • At the end of years 3, 6 and 9, the new equipment will require a service. Each of these services will cost $50,000.

The firm’s tax rate is 30%. The firm requires a 12% required rate of return on all potential investments.


In relation to the above proposal:

  1. Calculate the annual after-tax cash flows and annual after-tax profit.
  2. Calculate the payback period.
  3. Calculate the net present value.
  4. Calculate the internal rate of return.
  5. Calculate the accounting rate of return.

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