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A security team for a local high school contemplates replacing their current contract security system with a...

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Finance

Asecurity team for a local high school contemplates replacing theircurrent contract security system with a new and improved version.It will cost $450,000 to get the new system and the cost will bedepreciated straight-line to 0 over the system’s 4-year expectedlife. The system is expected to be worth $250,000 at the end of 4years. The security team believes that the new system will savethem $125,000 per year (before taxes) in contract security costs.The tax rate is 34%, the required rate of return is 17%.

What is the NPV (Net Present Value) for buying the new system?SHOW EBIT, OCF, CS, and PROJECT CASH FLOW for each year of theproject’s life.

Answer & Explanation Solved by verified expert
4.3 Ratings (692 Votes)
Cost of new system 450000 Initial Cash outflow in year 0 Cost of New system 450000 Annual Straight line depreciation Cost of system Book value at end of 4 years 4 450000 0 4 112500 Since the system will save costs therefore incremental costs for year 1 to 4 125000    See Answer
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Asecurity team for a local high school contemplates replacing theircurrent contract security system with a new and improved version.It will cost $450,000 to get the new system and the cost will bedepreciated straight-line to 0 over the system’s 4-year expectedlife. The system is expected to be worth $250,000 at the end of 4years. The security team believes that the new system will savethem $125,000 per year (before taxes) in contract security costs.The tax rate is 34%, the required rate of return is 17%.What is the NPV (Net Present Value) for buying the new system?SHOW EBIT, OCF, CS, and PROJECT CASH FLOW for each year of theproject’s life.

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