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    Compute the NPV, IRR, and payback period

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    Investment criteria) Compute the NPV, IRR, and payback period for the following investment.
    The cost of capital is 10%.

    Year 0 1 2 3
    Cash flow - 200,000 100,000 100,000 150,000


    (Cash flows and NPV for a new project) Syracuse Roadbuilding Company is considering
    the purchase of a new tandem box dump truck. The truck costs $95,000, and an additional
    $5,000 is needed to paint it with the firm logo and install radio equipment. Assume the
    truck falls into the MACRS three-year class. The truck will generate no additional revenues,
    but it will reduce cash operating expenses by $35,000 per year. The truck will be
    sold for $40,000 after its five-year life. An inventory investment of $4,000 is required during
    the life of the investment. Syracuse Roadbuilding is in the 45% income tax bracket.
    a. What is the net investment?
    b. What is the after-tax net operating cash flow for each of the five years?
    c. What is the after-tax salvage value?
    d. Assuming a 10% cost of capital, what is the NPV of this investment?

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    Solution Summary

    The solution computes the NPV, IRR, and payback period.