The treasurer of United Southern Capital Co. has submitted a proposal to the board of directors that, he argues, will increase profits for the all-equity company by a whopping 55%. It costs $900 and saves $290 in labor costs, providing a 3.1-year payback even though the equipment has an expected 5-year life (with no salvage value). If the firm has a 50% tax rate, uses straight-line depreciation, and has a 10% weighted average after-tax cost of capital, should the project be accepted?
Income statements before and after the project are given in Tables Q 1 and Q 2, respectively.
