Question: Extended Learning Exercise This case study is a justification of a computer system for, the ABC Company. The following are known data:
• The combined initial hardware and software cost is $80,000.
• Contingency costs have been set at $15,000. These are not necessarily incurred.
• A service contract on the hardware costs $500 per month.
• The effective income tax rate (t) is 38%.
• Company management has established a 15% (= im) per year hurdle rate (MARR). In addition, the following assumptions and projections have been made:
• In order to support the system on an ongoing basis, a programmer/analyst will be required. The starting salary (first year) is $28,000, and fringe benefits amount to 30% of the base salary. Salaries are expected to increase by 6% each year thereafter.
• The system is expected to yield a staff savings of three persons (to be reduced through normal attrition) at an average salary of $16,200 per year per person (base salary plus fringes) in year-zero (base year) dollars. It is anticipated that one person will retire during the second year, another in the third year, and a third in the fourth year.
• A 3% reduction in purchased material costs is expected; first year purchases are $1,000,000 in year-zero dollars and are expected to grow at a compounded rate of 10% per year.
• The project life is expected to be six years, and the computer capital investment will be fully depreciated over that time period [MACRS (GDS) five-year property class]. Based on this information, perform an actual-dollar ATCF analysis. Is this investment acceptable based on economic factors alone?