S&J Consulting is considering investing in a computer network system for their company. The hardware will cost $50,000. In addition, S & J must pay for freight charges of $350 and installation charges of $1,650. The system will be used for 4 years. At the end of 4 years, the equipment will be sold back to the distributor for $7,500. Maintenance costing $2,500 will need to be performed at the end of the second year. The cost of the new equipment will be allocated (depreciated) equally over the 4 years of its useful life. The computers currently being used originally cost $30,000. Accumulated depreciation on these computers totals $27,000. If the new system is purchased, the old computers could be sold for a total of $4,000. Additional working capital (to be released at the end of 4 years) of $2,000 will be needed to run the system. The new system is expected to generate additional revenues of $25,000 per year. S & J's tax rate is 21% and the cost of capital is 12%. Should the investment be made?

Answer rating: 100% (QA)

Solution net operating cash flow after tax profit depreciation recovery o... View the full answer