a. eEgg is considering the purchase of a new distributed network computer system to help handle its

Question:

a. eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $60,000 to purchase and install and $30,000 to operate each year. The system is estimated to be useful for four years. Management expects the new system to reduce by $62,000 a year the cost of managing inventories. The firm’s cost of capital is 10 percent.

Required

What is the net present value (NPV) of the proposed investment under each of the following independent situations?

1. The firm is not yet profitable and pays no taxes.

2. The firm is in the 30 percent income tax bracket and uses straight-line depreciation with no salvage value. Assume MACRS rules do not apply.

3. The firm is in the 30 percent income tax bracket and uses double-declining-balance depreciation with no salvage value. Assume MACRS rules do not apply.

b. Use the data for eEgg and answer the first two questions. This time, however, compute the internal rate of return (IRR) in each case.

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... Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment... 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... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...