Question: New equipment purchase, income taxes. Ella's Bakery plans to purchase a new oven for its store. The oven has an estimated useful life of 4 years. The estimated pretax cash flows for the oven are as shown in the table that follows, with no anticipated change in working capital. Ella's Bakery has a 14% after-tax required rate of return and a 35% income tax rate. Assume depreciation is calculated on a straight-line basis for tax purposes using the initial investment in the oven and its estimated terminal disposal value. Assume all cash flows occur at year-end except for initial investment amounts.
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1. Calculate
(a) net present value,
(b) payback period, and
(c) internal rate of return.
2. Calculate accrual accounting rate of return based on net initial investment.