# Rossco is considering the purchase of a new computer with the following estimated costs: initial systems design,

## Question:

Rossco is considering the purchase of a new computer with the following estimated costs: initial systems design, $54,000; hardware,$74,000; software, $35,000, one-time initial training,$11,000; system installation, $20,000; and file conversion,$12,000. A net reduction of three employees is expected, with average yearly salaries of $40,000. The system will decrease average yearly inventory by$150,000. Annual operating costs will be \$30,000 per year.

The expected life of the machine is four years, with an estimated salvage value of zero. The effective tax rate is 40%. All computer purchase costs will be depreciated using the straight-line method over its four-year life. Rossco can invest money made available from the reduction in inventory at its cost of capital of 11%. All cash flows, except for the initial investment and start-up costs, are at the end of the year. Assume 365 days in a year.

Use a spreadsheet to perform a feasibility analysis to determine if Rossco should purchase the computer. Compute the following as part of the analysis:initial investment, after-tax cash flows for years 1 through 4, payback period, net present value, and internal rate of return.

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...
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...
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