Rossco is considering the purchase of a new computer with the following estimated costs: initial...
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Accounting
Rossco is considering the purchase of a new computer with the following estimated costs: initial systems design, $54,000; hardware, $74,000; software, $35,000, one-time initial training, $11,000; system installation, $20,000; and file conversion, $12,000. A net reduction of three employees is expected, with average yearly salaries of $40,000. The system will decrease average yearly inventory by $150,000. Annual operating costs will be $30,000 per year.
The expected life of the machine is four years, with an estimated salvage value of zero. The effective tax rate is 40%. All computer purchase costs will be depreciated using the straight-line method over its four-year life. Rossco can invest money made available from the reduction in inventory at its cost of capital of 11%. All cash flows, except for the initial investment and start-up costs, are at the end of the year. Assume 365 days in a year.
Year 1
Year 2
Year 3
Year 4
Present value factor (discount rate 11%)
0.9009
0.8116
0.7312
0.6587
Required:
1. What is the payback period? 2. NPV? IRR?
Note, if you could, could you provide steps on how to do this? I was only given the question in multiple-choice format with no explanation on how to solve!
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