The management of Wombat Village, a private refuge for endangered wildlife, is considering an investment in an electrified fencing system to keep out feral foxes and cats. The fences would cost $186 300 and have a useful life of seven years. The refuge’s finance manager has estimated that the new fencing system will save the business $40 500 per year after taxes in security costs. The fencing system will have no salvage value. The tax rate is 36 percent.
1 Calculate the payback period for the proposed capital expenditure.
2 Calculate the net present value of the proposed investment, assuming a required rate of return after tax of:
(a) 8 percent.
(b) 10 percent.
(c) 12 percent.