Skystar company purchased a computer 6 years ago for $1,800,000 is worth $800,000 today and will have a salvage value of $240,000 after 3 more years.
The computer generates revenues of $750,000 per year. The costs of operating the computer are $380,000 per year. The company currently has $80,000 invested in operating net working capital. The investment in operating net working capital will remain at this level for the remaining 3 years of the
project.

The new computer will cost $2,430,000. It will cost $150,000 to install the new computer. The new computer will generate revenues of $1,180,000 per year. In addition, the cost of operating the new computer will be $470,000 per year. The company will have to increase its investment in operating net working capital to $155,000 at time zero. At the end of 3 years, the new machine will have a salvage value of $610,000.

The company just received a report from a consulting firm where they did an analysis of replacing the old computer with a new computer. The company paid $125,000 for the report. The consultants recommended that the company replace the old computer with a new computer since the average
accounting rate of return was 20.5%.
The company’s corporate tax rate is 28%, the CCA rate is 30% and the required rate of return is 8%. Assume the asset class remains open.
Using net present value (NPV) calculation, determine if the company should purchase the new computer.

Answer rating: 100% (QA)

To determine whether Skystar company should purchase the new computer we can calculate the net present value NPV of the investment NPV is a method of ... View the full answer