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 Mountain’s 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

Explanation / Answer

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 If the value of future savings is $7000 per year, then we can find its present value at 10% discount rate : Present value of savings = $30,486.82 and present value of costs = $17,527.48 So the Net present value of savings = $12,959.34 Which is positve, so this deal is acceptable.

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