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# Payback, Net present value, and depreciation tax shield

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1)Calculate the payback for a project that costs \$1,000 and is expected to provide cash inflows of \$400 per year for the next three years. If the required payback is 3 years, should the firm accept the project?

2)Calculate the net present value for a project that costs \$1,000 and is expected to provide cash inflows of \$400 per year for the next three years if the cost of capital is 10%. Should the firm accept the

3)Calculate the depreciation tax shield for an asset that costs \$100,000 and is depreciated over 10 years using straight line depreciation if the firm's tax rate is 30%.

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#### Solution Preview

1) Calculate the payback for a project that costs \$1,000 and is expected to provide cash inflows of \$400 per year for the next three years. If the required payback is 3 years, should the firm accept the project?

Payback period is defined as the expected number of years required to recover the original investment.

Year before full recovery + Unrecovered cost at start of year/Cash flow during year

-\$1,000 + 400 ...

#### Solution Summary

This solution is comprised of a detailed explanation to calculate the payback, net present value, and depreciation tax shield.

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