347. CSO: 2D3a LOS: 2D3c Smithco is considering the acquisition of scanning equipment to mechanize its procurement process. The equipment will require extensive testing and debugging, as well as user training prior to its operational use. Projected after-tax cash flows are shown below. Time Period After-Tax Cash Year Inflow/(Outflow) 0 $(550,000) 1 $(500,000) 2 $450,000 3 $350,000 4 $250,000 5 $150,000 Management anticipates the equipment will be sold at the beginning of year 6 for $50,000 when its book value is zero. Smithco’s internal hurdle and effective tax rates are 14% and 40%, respectively. The project’s payback period will be a. 2.3 years. b. 3.0 years. c. 3.5 years. d. 4.0 years.

2D3C SMITHCO IS CONSIDERING THE ACQUISITION OF SCANNING EQUIPMENT TO...

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347.

CSO: 2D3a

LOS: 2D3c

Smithco is considering the acquisition of scanning equipment to mechanize its

procurement process. The equipment will require extensive testing and debugging, as

well as user training prior to its operational use. Projected after-tax cash flows are shown

below.

Time Period

After-Tax Cash

Year

Inflow/(Outflow)

$(550,000)

$(500,000)

$450,000

$350,000

$250,000

$150,000

Management anticipates the equipment will be sold at the beginning of year 6 for

$50,000 when its book value is zero. Smithco’s internal hurdle and effective tax rates are

14% and 40%, respectively. The project’s payback period will be

2.3 years.

3.0 years.

3.5 years.

4.0 years.