Kellaway Ltd is considering installing a computer controlled production line to significantly reduce its manufacturing costs. The annual after-tax cost savings are expected to be \($230\) 000, and the production line will cost \($900\) 000. Its useful life will be 5 years and its resale value at that time is estimated at \($100\) 000, net of tax effects. However, a major upgrade costing \($40\) 000 will be required at the end of the third year. The company’s cost of capital is 12%.

Required

(a) Using the net present value method, determine whether the computer controlled system should be purchased. Justify your conclusion.