Mack and Myer, LLP, a law firm, is considering the replacement of its old accounting system with new software that should save $10,000 per year in net cash operating costs. The old system has zero disposal value, but it could be used for the next 5 years. The estimated useful life of the new software is 5 years with zero salvage value, and it will cost $40,000. The required rate of return is 14%.
1. What is the payback period?
2. Compute the NPV.
3. Management is unsure about the useful life. What would be the NPV if the useful life were
(a) 3 years instead of 5 or (b) 10 years instead of 5?
4. Suppose the life will be 5 years, but the savings will be $8,000 per year instead of $10,000. What would be the NPV?
5. Suppose the annual savings will be $9,000 for 4 years. What would be the NPV?

  • CreatedNovember 19, 2014
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