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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.

    $2.19

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