Question

ABC is considering the purchase of a new computer system for the social marketing department. The system costs $375,000 and has an expected life of five years, salvage value of $15,000, and networking capital of $50,000. The manager estimates the following savings will result if the system is purchased: (10 points) Year or Period Savings 1 $1000,000 2 125,000 3 130,000 4 85,000 5 125,000 If ABC uses a 10% discount rate for capital-budgeting decisions, the net present value of the computer system would be: Required: If ABC uses a 10% discount rate for capital-budgeting decisions. What is the payback period of the computer system? What is the net present value of the computer system? What is the internal rate of return for the computer system?

Answer 1

Cash outflow in year 0 = $375,000 + $15000	$    390,000.00
Year 5 Cash flow = $125000 + 15000 +50000	$    190,000.00
Year	Cash flows	Discount Rate @ 10%	Present Value
0	$  (390,000.00)	1.0000	$ (390,000.0000)
1	$ 1,000,000.00	0.9091	$  909,090.9091
2	$    125,000.00	0.8264	$  103,305.7851
3	$    130,000.00	0.7513	$    97,670.9241
4	$      85,000.00	0.6830	$    58,056.1437
5	$    190,000.00	0.6209	$  117,975.0514
	NPV		$  896,098.8134
	IRR	174%
a)
Payback period = 1 year
b)
NPV = 896,098.81
c)
IRR = 174%