Jennings Creations is considering an investment in a computer that is capable of producing various images that are useful in the production of commercial art. The computer would cost $20,000 and have an expected life of eight years. The computer is expected to generate additional annual net cash receipts (before-tax) of $6,000 per year. The computer will be depreciated according to the
straight-line method and the firm's marginal tax rate is 25 percent. Refer to Jennings Creations. What is the after-tax payback period for the computer project?
a. 7.62 years
b. 3.90 years
c. 4.44 years
d. 3.11 years
B
Payback Period = Investment/After-Tax Cash Flows
After Tax Cash Flows = [(6,000 *0.75) + (2,500 *0.25)] = $5,125
Payback Period = $20,000/$5,125 = 3.90 years
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