A new livestock feeding barn requires an initial outlay of $780,000 and is expected to yield annual net cash flows of $132,000 over the investment’s 10-year planning horizon with no salvage value at the end of that period.
a. In the face of an 6% discount rate that the investor faces, calculate the net present value, internal rate of return, simple rate of return, and payback period before any income tax implications are considered.
b. Now consider the case where the investor finances the purchase of the facility with a 20% equity down payment and repayment of the loan in 7 equal annual principal payments that include interest that is charged at 8% annually on the outstanding loan balance. Calculate the same four measures as in a and compare/contrast your findings.
c. Now suppose that the investor finds herself in the 35% tax bracket. Recalculate each of the four measures under the scenarios outlined in both a and b as they now reflect an after-tax perspective. In your analysis, assume that the original capital purchase is depreciated using a straight-line method across ten years (no partial year consideration). How does the tax obligation influence the investment analysis results for each measure?