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 $460000, and the production line will cost $1 800000. Its useful life will be 5 years and its resale value at that time is estimated at $200000, net of tax effects. However, a major upgrade costing $80000 will be required at the end of the third year. The company’s cost of capital is 12%.

Required

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