Scott Investors, Inc., is considering the purchase of a $360,000 computer with a

Question

Scott Investors, Inc., is considering the purchase of a $360,000 computer with an economic life of five years. The computer will be fully depreciated over five years using the straight-line method. The market value of the computer will be $60,000 in five years. The computer will replace five office employees whose combined annual salaries are $105,000. The machine will also immediately lower the firm

Scott Investors, Inc., is considering the purchase of a $360,000 computer with an economic life of five years. The computer will be fully depreciated over five years using the straight-line method. The market value of the computer will be $60,000 in five years. The computer will replace five office employees whose combined annual salaries are $105,000. The machine will also immediately lower the firm

Explanation / Answer

cash flow in year 0 = -360000 + 80000 = -280000

deprecition per year = 360000/5 = 72000

cash flow in years 1-5 = (105000 - 72000) * (1-0.34) + 72000 = 93780

termianl cash flow = 60000 * (1-0.34) - 80000 = -40400

NPV = -280000 + 93780/1.12 + 93780/1.12^2 + 93780/1.12^3 + 93780/1.12^4 + 93780/1.12^5 - 40400/1.12^5

= $35,131.87

since NPV is positive , it is worthwhile to buy the computer

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