Cristina Company is considering investing in a new electronic data interchange (EDI) integrated system. The expected data follow. The cost savings are already after taxes, so taxes can be ignored.

a. Set up the schedule of relevant cash flows below. Label clearly the relevant items. Calculate the net present value in the last column.

b. Calculate the payback period

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Acquisition cost Useful life Additional major improvement in 3 years Salvage value at end of 8 years Years 1, 2, 3, 4 Annual cost savings Years 5, 6, 7, 8 Salary of janitor per year whether the company buys the system or not Management estimates of the old, fully depreciated system if sold today Cost of capital is 12%. $450,000 8 years $36,000 $84,000 $130,000 $150,000 $22,000 $12,000