Problem:
A salad oil bottling plant can either buy caps for the glass bottles at $0.05 each or install $500,000 worth of plastic molding equipment and manufacture the caps at the plant. The manufacturing engineer estimates the material, labor, and other costs would be $0.03 per cap.
Problem:
Question 1: If 12 million caps per year are needed and the molding equipment is installed, what is the payback period?
Question 2: The plastic molding equipment would be depreciated by straight-line depreciation using a 5-year useful life and no salvage value. Assuming a combined 40% income tax rate, what is the after-tax payback period, and what is the after-tax rate of return?
Note: Show all workings.