Chapter 16, Problem 35E

The management of Niagra National Bank is considering an investment in automatic teller machines. The machines would cost $124,200 and have a useful life of seven years. The bank’s controller has estimated that the automatic teller machines will save the bank $27,000 after taxes during each year of their life (including the depreciation tax shield). The machines will have no salvage value.

Required:

1. 1. Compute the payback period for the proposed investment.
2. 2. Compute the net present value of the proposed investment assuming an after-tax hurdle rate of: (a) 10 percent, (b) 12 percent, and (c) 14 percent.
3. 3. What can you conclude from your answers to requirements (1) and (2) about the limitations of the payback method?
4. 4. Build a spreadsheet: Construct an Excel spreadsheet to solve requirements (1) and (2) above. Show how the solution will change if the following information changes: the machines would cost $134,400, and the annual savings amount to $28,000.