After-Tax Net Present Value and IRR (non-MACRS rules)
a. eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $60,000 to purchase and install and $30,000 to operate each year. The system is estimated to be useful for four years. Management expects the new system to reduce by $62,000 a year the cost of managing inventories. The firm’s cost of capital is 10 percent.
Required What is the net present value (NPV) of the proposed investment under each of the following independent situations?
1. The firm is not yet profitable and pays no taxes.
2. The firm is in the 30 percent income tax bracket and uses straight-line depreciation with no salvage value. Assume MACRS rules do not apply.
3. The firm is in the 30 percent income tax bracket and uses double-declining-balance depreciation with no salvage value. Assume MACRS rules do not apply.
b. Use the data for eEgg and answer the first two questions. This time, however, compute the internal rate of return (IRR) in each case.
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