Problem:
Capital Cost Allowance and Present Values
The president of a software company is contemplating acquiring some computers used for designing software. The computers will cost $150,000 cash and will have zero terminal salvage value. The recovery period and useful life are both three years. Annual pre-tax case savings from operations will be 75,000. The income tax rate is 40 percent, and the required after-tax rate of return is 16 percent.
1) Compute the net present value, assuming Class 10, 30 percent declining balance for tax purposes.
2) Suppose the required after-tax rate of return is 12 percent instead of 16 percent. Should the computers be acquired? Show computations.