Valleyview Company runs hardware stores in a tri- state area. Valleyview’s management estimates that if it invests $ 325,000 in a new computer system, it can save $ 72,000 in annual cash operating costs. The system has an expected useful life of 8 years and no terminal disposal value. The required rate of return is 8%. 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. Discounted payback period
d. Internal rate of return (using the interpolation method)
e. Accrual accounting rate of return based on the net initial investment (assume straight- line depreciation)
2. What other factors should Valleyview consider in deciding whether to purchase the new computer system?

  • CreatedJanuary 15, 2015
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