Norwegian Investors, Inc., is considering the purchase of a $400,000 computer with an economic life of
four years. The computer will be fully depreciated over four years using the straight-line method. The
market value of the computer will be $80,000 in four years. The computer will replace five office
employees whose combined annual salaries are $175,000 but will also require a new IT employee that will cost $50,000 annually, plus a bonus sign of $20,000. The machine will also immediately lower the firm’s
required net working capital by $90,000. This amount of net working capital will need to be added back
again once the machine is sold. The corporate tax rate is 34 percent. Is it worthwhile to buy the computer if the appropriate discount rate is 12 percent?
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