The owner of Black Hills Cafe is considering the purchase of a new semi-automatic coffee-making. The machine will cost $75 000 and last 10 years. The machine is expected to have no salvage value at the end of its useful life. The owner estimates that the new machine will generate $12 000 in after-tax savings each year during its life (including the tax effect of depreciation). The depreciation charge is the same for accounting and tax purposes.
Calculate the profitability index for the proposed vending machine, assuming the after-tax required rate of return of:
(a) 6 percent.
(b) 8 percent.
(c) 10 percent.