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 10 percent, and the costs and values of investments made at different times in the future are as follows: Year Cost Value of Future Savings (at time of purchase)

0 $5,000 $7,000

1 4,500 7,000

2 4,000 7,000

3 3,600 7,000

4 3,300 7,000

5 3,100 7,000

Calculate the NPV of each choice. (Round answers to the nearest whole dollar, e.g. 5,275.) The NPV of each choice is: NPV0 = $

NPV1 = $

NPV2 = $

NPV3 = $

NPV4 = $

NPV5 = $

Suggest when should Bell Mountain buy the new accounting system? Bell Mountain should purchase the system in .

Explanation / Answer

The NPV of each choice is:

NPV0 = 2,000

NPV1 = 2,500 / (1.1)1 = 2,275

NPV2 = 3,000 / (1.1)2 = 2,479

NPV3 = 3,400 /(1.1)3 =2,554

NPV4 = 3,700 / (1.1)4 = 2,527

NPV5 = 3,900 / (1.1)5 = 2,422

Therefore the company should buy it in year 3.

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