Rob Roy Corporation has been using its present facilities at its annual full capacity of 10,000 units for the last 3 years. Still, the company is unable to keep pace with continuing demand for the product that is estimated to be 25,000 units annually. This demand level is expected to continue for at least another 4 years. To expand manufacturing capacity and take advantage of the demand, Rob Roy must acquire equipment costing $1,000,000. The equipment will double the current production quantity. This equipment has a useful life of 10 years and can be sold for $200,000 at the end of year 4 or $30,000 at the end of year 10. Analysis of current operating data provides the following information: Per Unit
Sales price $200
Variable costs:
Manufacturing $97
Marketing 10 $107
Fixed costs:
Manufacturing $45
Other 25 70 177
Pretax operating income $23

The fixed costs include depreciation expense of the current equipment. The new equipment will not change variable costs, but the firm will incur additional fixed manufacturing costs (excluding depreciation on the new machine) of $250.000 annualy. The firm needs to spend an additional $200.000 in fixed marketing costs per year for additional sales Rob Roy is in the 35% tax bracket Management has set a minimum rate of return of 15.0% after-tax for all capitai investments. Assume, for simplicity, that MACRS depreciation rules do not apply.

Required:
a. Assume that the equipment will be depreciated over a 4-year period using the straight-ine method. What effects will the new equipment have on after-tax operating income in each of the 4 years?
b. What effect will the new equipment have on after-tax cash inflows in each of the 4 years?
c. Compute the proposed investment's payback period (in years) under the assumption that after-tax cash inflows occur evenly throughout the year.