An office is considering purchasing a new IT system at a cost of $60,000 The system will result in a $45,000 improvement in yearly sales, resulting in an additional $21,000 in cost of goods sold. The additional sales should require a $14,000 increase in current assets and an $8,000 increase in current liabilities. The new system will depreciates at $15,000 each year, and the office's average tax rate is 35% After 3 years, the system will likely be obsolete and need to be replaced. In the start of the 4th year, after 3 full years of depreciation, the system should be sold off for $14,000

What is the initial startup cash flow of the system? What is the annual incremental operating cash flow associated with this system? What is the shutdown cash flow of the system? Given a cost of capital of 5.2%, what is the NPV of the system? Is the system worth doing?

Answer rating: 100% (QA)

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