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:

Child Support

Monetary payments by the noncustodial parent to the custodial parent to help pay for child-rearing expenses.

Breadwinner Father

A traditional role where the father is the primary provider for the financial needs of the family.

Economic Responsibility

involves the obligation to make decisions and act in ways that positively affect the economic well-being of society, including responsible spending, investing, and resource allocation.

Involved Father

A father who actively participates in the upbringing and care of his children, contributing significantly to their developmental needs.