The controller of Tims Travel (TT) is deciding between upgrading the companys existing computer system or replacing
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The BetaTech Company has quoted a price of $224,800 for a new computer with a useful life of seven years. Annual operating costs are estimated to be $14,260. The average processing speed of the new computer is 12% faster than that of other systems in its price range, which would increase TT’s profits by 4.5%.
Tim’s present tax rate is 35%, and the cost of financing (minimum desired rate of return) is 11%. After seven years, the salvage value, net of tax, would be $12,000 for the new computer and $7,500 for the present system. For tax purposes, computers are depreciated over five full years (six calendar years; a half year the first and last years), and the depreciation percentages are as follows:
Year.....Percent (%)
1........20.00
2........32.00
3.........19.20
4.........11.52
5.........11.52
6.........5.76
Using a spreadsheet package, prepare an economic feasibility analysis to determine if Tim’s Travel should rehabilitate the old system or purchase the new computer. As part of the analysis, compute the after-tax cash flows for years 1 through 7 and the payback, NPV, and IRR of each alternative.
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
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Accounting Information Systems
ISBN: 978-0133428537
13th edition
Authors: Marshall B. Romney, Paul J. Steinbart
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