A manager of Fidelity Mutual Funds is contemplating acquiring servers to operate its website. The...
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A manager of Fidelity Mutual Funds is contemplating acquiring servers to operate its website. The servers will cost $570,000 cash and will have zero terminal salvage value. The recovery period and useful life are both 3 years. Annual pre-tax cash savings from operations will be $200,000. The income tax rate is 40%, and the required after-tax rate of return is 10%. A. Compute the NPV, assuming straight-line depreciation of $190,000 yearly for tax purposes. Should Fidelity acquire the computers? Explain. (8 marks) B. Suppose the computers will be fully depreciated at the end of year 3 but can be sold for $90,000 cash. Compute the NPV. Should Fidelity acquire the computers? Explain. (7 marks)
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