The management of Kimco is evaluating replacing their large mainframe computer with a modern network system that requires much less office space.
The network would cost $500,000 (including installation costs) and due to efficiency gains, would generate $125,000 per year in operating cash flows (accounting for taxes and depreciation) over the next five years. The mainframe has a remaining book value of $50,000 and would be immediately donated to a charity for the tax benefit.
Kimco's cost of capital is 10 percent and the tax rate is 40 percent. On the basis of NPV, should management install the network system?