Problem:
The law firm of Bushmaster, Cobra and Asp is considering investing in a complete small business computer system. The initial investment will be $35,000. The computer is in the 5-year MACRS category, and the firm's tax rate is 34%. The computer system is expected to provide additional revenue of $15,000 per year for the next six years, and to reduce expenses by $10,000 per year for the same period.
Required:
Question 1: Calculate the net after-tax cash flows from this investment.
Question 2: Calculate the net present value of the system, that the law firm's weighted average cost of capital is 12%.
Question 3: Should they buy the computer system?
Note: Please explain comprehensively and give step by step solution.