The CPA practice of Knape, Knape & Knape is considering investing in a complete small business computer system. The initial investment will be $70,000. The computer is in the 5-year MACRS category, and the firm's tax rate is 43%. The computer system is expected to provide additional revenue of $32,000 per year for the next six years, and to reduce expenses by $7,000 per year for the same period.
a) Calculate the net after-tax cash flows from this investment.
b) Calculate the net present value of the system, given that the law firm's weighted average cost of capital is 12%. Compute IRR in Excel using IRR formula.
c) Should they buy the computer system?