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A new computer system will require an initial outlay of $17,000, but it will increase the...

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Finance

A new computer system will require an initial outlay of $17,000,but it will increase the firm’s cash flows by $3,400 a year foreach of the next 7 years.

a. Calculate the NPV and decide if the system is worthinstalling if the required rate of return is 10%.

b. Calculate the NPV and decide if the system is worthinstalling if the required rate of return is 15%.

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year Cash flow PVIF @ 10% PVIF @ 15% Present value with 10% cost of eqiuty Present value with 15% cost of eqiuty
0 -17000     1.0000       1.0000                             (17,000.00)            (17,000.00)
1 3400     0.9091       0.8696                                 3,090.91                2,956.52
2 3400     0.8264       0.7561                                 2,809.92                2,570.89
3 3400     0.7513       0.6575                                 2,554.47                2,235.56
4 3400     0.6830       0.5718                                 2,322.25                1,943.96
5 3400     0.6209       0.4972                                 2,111.13                1,690.40
6 3400     0.5645       0.4323                                 1,919.21                1,469.91
7 3400     0.5132       0.3759                                 1,744.74                1,278.19
                                 (447.38)              (2,854.57)
ans a) NPV @ 10% =      (447.38)
ans b) NPV @ 15% = (2,854.57)

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Transcribed Image Text

A new computer system will require an initial outlay of $17,000,but it will increase the firm’s cash flows by $3,400 a year foreach of the next 7 years.a. Calculate the NPV and decide if the system is worthinstalling if the required rate of return is 10%.b. Calculate the NPV and decide if the system is worthinstalling if the required rate of return is 15%.

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