Clerihew Kennels, a no-kill, not-for-profit, animal shelter, is considering replacing its manual accounting system with a computerized accounting system. As of January 1, 2011, the software package and related equipment will cost the company $ 300,000 and are expected to have a useful life of five years. Clerihew’s analyst has forecast that efficiencies created by the new system will reduce the cost of operating the accounting system by the following amounts:
2011 ............................... $ 60,000
2012 ............................... 90,000
2013 ............................... 150,000
2014 ............................... 75,000
2015 ............................... 75,000
Assuming that Clerihew uses a 13 percent hurdle rate, what is the net present value of the software package and related equipment? Should Clerihew purchase the accounting system? Why?