Bell Mountain Vineyards is considering updating its current manual accounting sy

Question

Bell Mountain Vineyards is considering updating its current manual accounting system with a high-end electronic system. While the new accounting system would save the company money, the cost of the system continues to decline. The Bell Mountains opportunity cost of capital is 12.9 percent, and the costs and values of investments made at different times in the future are as follows:

Year       Cost                       Value of future savings

0              $5,000                   $7,000

1              4,550                     7,000

2              4,100                     7,000

3              3,650                     7,000

4              3,200                     7,000

5              2,750                     7,000

Calculate the NPV of each choice.

Explanation / Answer

Rate (cost of capital) 12.90% Year or choice of year to buy system Cost of system PV of cost of system Savings PV of savings Savings PV of savings 0 -5000 -5000.00 7000 7000 2000 2000 1 -4550 -4030.12 7000 6200.177 2450 2170.062002 2 -4100 -3216.59 7000 5491.742 2900 2275.150415 3 -3650 -2536.36 7000 4864.254 3350 2327.892822 4 -3200 -1969.58 7000 4308.462 3800 2338.879401 5 -2750 -1499.21 7000 3816.175 4250 2316.96365 NPV= 13428.94829

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