14. Barclay Corporation invested $600,000 in a capital project, including $40,000 in installation charges.  The project had a useful life of 12 years with no salvage value and generated cash flows of $150,000 each year.  Assuming a 30% tax rate and straight-line depreciation for tax purposes, Barclay’s after-tax cash flows per year would have been equal to:

hoice 2 is correct.

Pre-tax cash flows                                                                                   $150,000

Less taxes                                                                           30%               (45,000)

Plus: Tax protection on depreciation

      Capital                                                     $600,000

      Useful life                                                           12

      Depreciation                                                 50,000        30%                15,000

After-tax cash flows                                                                                $120,000

15.  Garter Company anticipates buying a $250,000 piece of equipment that will cost $20,000 to install, have a nine-year useful life, and generate $90,000 per year in pre tax cash flows.  Assuming a 30 percent tax rate, what is the payback period for this investment in years?

Computation net investment

Capital investment                                                  $250,000

Installation charges                                                    20,000

Net initial investment$                                                                        270,000

Annual net after-tax cash flows

Pretax cash flows                                                         90,000

Less tax                                                30%               (27,000)

Investment                     $270,000

Useful life                                   9

Depreciation                      30,000     30%                    9,000

After-tax cash flows                                                                              72,000

           3.75

Ok, they way depreciation is calculated on both of these questions are different and I don’t understand why.  According to me, depreciation for #14 should 640,000/12.  It should take installation costs in to consideration like it does for #15. Why is #14 not taking installation costs into consideration? 

The wording in #14 says $600k was invested, including the $40k installation charges.  This means that the $600k already contains the $40k, so don't add it back.

In #15, it says the equipment (only) is $250k, and it costs $20k to install, meaning that the $250k does not include the $20k, so you have to add the $20k.