Solich Company Is Evaluating a New Tractor That Costs $1,350,000

question 36

Essay

Solich Company is evaluating a new tractor that costs $1,350,000 to replace the tractor purchased years earlier, which currently has no salvage value; the new tractor has an estimated useful life of five years with no disposal value or anticipated cost of disposal. For all its equipment, the company uses straight-line depreciation with no residual value. Solich is subject to a 40% income tax rate, t. The company uses a 12% hurdle rate for evaluating capital investment projects. The PV of an annuity of $1 at 12% for 5 years is 3.605, and the PV of $1 at 12% in 5 years is 0.567.
Required:
1. Compute the amount of annual before-tax savings (rounded to nearest whole number) that must be generated by the new tractor to have a payback period of 3.0 years.
2. Compute the amount of annual before-tax savings that must be generated by the new tractor to have an NPV of $500,000 at a discount rate of 12%. (Round your answer to the nearest whole dollar amount.)
3. Compute the amount of annual before-tax savings that must be generated by the new tractor to have an IRR of 12%. (Round your answer to the nearest whole dollar.)

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Definitions:

Evolutionary Psychology

A method in the social and natural sciences focusing on the study of psychological frameworks from a current evolutionary standpoint.

Psychology Defined

The scientific study of the mind and behavior, encompassing various aspects of conscious and unconscious experience as well as thought and emotion.

Insight Therapies

Forms of psychotherapy aiming to increase patients' understanding of themselves and their issues or behaviors.

Motivations

The reasons or desires that drive individuals to act in a particular way or pursue certain goals, often stemming from internal or external stimuli.