Question: The management of Kimco is evaluating replacing their large mainframe
The management of Kimco is evaluating replacing their large mainframe computer with a modern network system that requires much less office space. The network would cost $500,000 (including installation costs) and, due to efficiency gains, would generate $125,000 per year in operating cash flows (accounting for taxes and depreciation) over the next five years due to efficiency gains. The mainframe has a remaining book value of $50,000 and would be immediately donated to a charity for the tax benefit. Kimco’s cost of capital is 10 percent and tax rate is 40 %. On the basis of NPV, should management install the network system?
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