1. **Problem Statement:** A company plans to invest 600,000 in drying equipment with a 5-year life and no salvage value. Cash inflows before tax are given for each year. The tax rate is 35%, and the discount rate is 12%. We evaluate the investment using Payback Period, Net Present Value (NPV), and Profitability Index (PI). 2. **Depreciation Calculation:** Using straight-line depreciation: $$\text{Depreciation per year} = \frac{600,000}{5} = 120,000$$ 3. **Calculate After-Tax Cash Inflows:** For each year, taxable income = cash inflow - depreciation. Tax = taxable income \times 0.35. After-tax cash inflow = cash inflow - tax. Year 1: Taxable income = 240,000 - 120,000 = 120,000 Tax = 120,000 \times 0.35 = 42,000 After-tax inflow = 240,000 - 42,000 = 198,000 Year 2: Taxable income = 275,000 - 120,000 = 155,000 Tax = 155,000 \times 0.35 = 54,250 After-tax inflow = 275,000 - 54,250 = 220,750 Year 3: Taxable income = 210,000 - 120,000 = 90,000 Tax = 90,000 \times 0.35 = 31,500 After-tax inflow = 210,000 - 31,500 = 178,500 Year 4: Taxable income = 180,000 - 120,000 = 60,000 Tax = 60,000 \times 0.35 = 21,000 After-tax inflow = 180,000 - 21,000 = 159,000 Year 5: Taxable income = 160,000 - 120,000 = 40,000 Tax = 40,000 \times 0.35 = 14,000 After-tax inflow = 160,000 - 14,000 = 146,000 4. **Payback Period:** Calculate cumulative after-tax cash inflows until initial investment is recovered. Year 1: 198,000 Year 2: 198,000 + 220,750 = 418,750 Year 3: 418,750 + 178,500 = 597,250 Year 4: 597,250 + 159,000 = 756,250 Investment 600,000 is recovered between Year 3 and Year 4. Payback period = 3 + \frac{600,000 - 597,250}{159,000} = 3 + 0.017 = 3.02 \text{ years} 5. **Net Present Value (NPV):** Use PV factors to discount after-tax cash inflows: $$\text{NPV} = -600,000 + \sum_{t=1}^5 \text{After-tax inflow}_t \times \text{PV factor}_t$$ Calculate each term: Year 1: 198,000 \times 0.8929 = 176,668.2 Year 2: 220,750 \times 0.7972 = 175,999.9 Year 3: 178,500 \times 0.7118 = 127,103.3 Year 4: 159,000 \times 0.6355 = 101,044.5 Year 5: 146,000 \times 0.5674 = 82,880.4 Sum = 176,668.2 + 175,999.9 + 127,103.3 + 101,044.5 + 82,880.4 = 663,696.3 NPV = 663,696.3 - 600,000 = 63,696.3 6. **Profitability Index (PI):** $$\text{PI} = \frac{\text{Present value of future cash inflows}}{\text{Initial investment}} = \frac{663,696.3}{600,000} = 1.106$$ 7. **Conclusion:** - Payback period is approximately 3.02 years. - NPV is positive at 63,696.3, indicating a profitable investment. - PI is greater than 1, supporting acceptance of the project. Hence, the investment proposal is financially viable based on these methods.