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 11.0 percent, and the costs and values of investments made at different times in the future are as follows:

The NPV of each choice is:

Year Cost Value of Future Savings
(at time of purchase) 0 $5,000 $7,000 1 4,650 7,000 2 4,300 7,000 3 3,950 7,000 4 3,600 7,000 5 3,250 7,000 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 Mountain's opportunity cost of capital is 11.0 percent, and the costs and values of investments made at different times in the future are as follows: Calculate the NPV of each choice. (Round answers to the nearest whole dollar, e.g. 5,275.) The NPV of each choice is: Suggest when should Bell Mountain buy the new accounting system?

Explanation / Answer

NPV0= $7000-5000=2000

NPV1=-4650*0.901+7000*0.901=2117.35

NPV2=-(4300*0.812)+7000*0.812=2192.4

NPV3=-3950*0.731+7000*0.731=2229.55

NPV4=-3600*0.658+7000*0.658=2237.2

NPV5=-3250*0.593+7000*0.593=2223.75

the new system should be bought in year 4 as NPV decreases after year4.

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