Guelph Company runs hardware stores in Ontario’s Golden Triangle area. Guelph’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.
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 Guelph Company consider in deciding whether to purchase the new computer system?