Shellys Tax Services prepares tax returns for individuals and small businesses. The firm employs four tax professionals.
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Initial cost of the hardware and software ......... $140,000
Expected salvage value in 4 years ............... $0
Annual depreciation ................ $30,000
Incremental annual operating costs ........... $8,500
Incremental annual labor savings ........... $47,500
Expected life of the computer system .......... 4 years
Foster has determined that she will invest in the computer system if its pre-tax payback period is less than 3.5 years and its pre-tax IRR exceeds 12 percent.
a. Compute the payback period for this investment. Does the payback meet Foster’s criterion? Explain.
b. Compute the IRR for this project to the nearest percentage. Based on the computed IRR, is this project acceptable to Foster? Explain.
c. What qualitative factors should Foster consider in evaluating the project?
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... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...
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Related Book For
Cost Accounting Foundations and Evolutions
ISBN: 978-1111626822
8th Edition
Authors: Michael R. Kinney, Cecily A. Raiborn
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