You are evaluating the possible purchase of a new computer network for improved inventory and order tracking.

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Question:

You are evaluating the possible purchase of a new computer network for improved inventory and order tracking. The system costs $80,000 and installation/site preparation costs $4,000. It has an expected life of 6 years and estimated salvage value of $1,000. This is classified as a 5- year MACRS class.

The company will borrow the full amount of initial investment (i.e. system costs and installation/site preparation costs). The bank loan interest rate is 11% APR compounded annually and the company will repay the loan in 5 equal annual payments.

Expected annual savings is $52,000 due to less inventory lost and better customer service from this improved tracking system.

There will be annual maintenance and upkeep expenses of $12,000. In addition, in year 1 there is an extra expense of $20,000 for some software customization.

The company’s tax rate is 21%. The company’s minimum attractive rate of return is 18%

a) Determine this project’s cash flows over the project life.

• Use the project cash flow table

• Show supporting calculations in detail for the following:

1. Financing activities for all years -- also use the loan principal and interest table for summarizing answers for all years.

2. All depreciation values

3. All tax values (including any tax associated with salvage).

• Additionally, for Year 1, show all “simple” calculations of Taxable income, income tax, net income, and net cash flow. You do not need to show your work for these specific calculations in other years.

b) Based on present worth analysis of the net cash flows from this project, is your project acceptable and state why