Question

Lethbridge Company runs hardwa Omekaxes«dge's management estimates that if it invests $160,000 in a new computer system, it can save $60,000 in annual cash operating costs. The system has an expected useful life of five years and no terminal disposal value. The required rate of return is 12%. Ignore income tax issues in your answers. Assume all cash flows occur at year-end except for initial investment amounts Required 1. Calculate the following for the new computer system: a. Net present value. b. Payback period c. Internal rate of return. d. Accrual accounting rate of return based on the net initial investment (assume straight- line depreciation) 2. What other factors should Lethbridge Company consider in deciding whether to purchase the new computer system? Slide # 0

Answer 1

82 X f 1(a) A B C E F G H 1 (a) | 2 increased annual contibution margin present value annuity factor (12%, 5 years) present value of increased contibution margin net initial investment net present value $60,000 3.60478 $216,286.80 $ 160,000 $ 56,286.80 other factors to be considered - a quality of the new computer system b the after sale services provided by the supplier. c whether the system is environmenal friendly or not. 1 (b) net initial investment increased annual contibution margin payback period $ 160,000 $ 60,000 2.67 years 1(C) internal rate of return 25.41% 1 (d) annual savings in cash operating costs annual depreciation annual net income net initial investment accrual accounting rate of return $ 60,000 $32,000 $ 28,000 $ 160,000 17.50%

for formulas and calculations, refer to the image below -

x fc 1(a) А в с F G H 1(a)! increased annual contibution margin 60000 present value annuity factor (12%, 5 years) =ROUND(-PV(12%,5,1),5) present value of increased contibution margin 1=E2*E3 net initial investment 160000 net present value =E4-E5 2 other factors to be considered - a quality of the new computer system b the after sale services provided by the supplier. c|whether the system is environmenal friendly or not. =E5 net initial investment increased annual contibution margin payback period =E2 =E9/E10 years internal rate of return =RATE(5,60000,-160000) 1 (d) annual savings in cash operating costs annual depreciation annual net income net initial investment accrual accounting rate of return 60000 =160000/5 =E16-E17 160000 =E18/E19

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