Guelph Company runs hardware stores in Ontarios Golden Triangle area. Guelphs management estimates that if it invests

Question:

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.
REQUIRED
1. Calculate the following for the new computer system:
a. .
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?
Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at...