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BD Corporation has purchased new computers to modernize the office. The increased efficiency from the computers...

BD Corporation has purchased new computers to modernize the office. The increased efficiency from the computers will lead to increases in productivity from the office staff. Estimates of the additional revenue from the productivity are $75,000 per year (end of year) for the next five years when the computers will need to be replaced. The new computers will cost $300,000. You will have to borrow from your local bank at a rate of 8% APR. Should you go ahead with the new computers?

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Answer #1

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=75000/1.08+75000/1.08^2+75000/1.08^3+75000/1.08^4+75000/1.08^5

=299453.25

NPV=Present value of inflows-Present value of outflows

=299453.25-300,000

=$-546.75(Approx)(Negative)

Hence since net present value is negative;new computers should not be purchased.

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