Rossco is considering the purchase of a new computer with the following estimated costs: initial systems design, $54,000; hardware, $74,000; software, $35,000; one time initial training, $11,000; system installation, $20,000; and file conversion, $12,000. A net reduction of three employees is expected, with average yearly salaries of $40,000. The system will decrease average yearly inventory by $150,000. Annual operating costs will be $30,000 per year.
The expected life of the machine is four years, with an estimated salvage value of zero. The effective tax rate is 40%. All computer purchase costs will be depreciated using the straight line method over its four year life. Rossco can invest money made available from the reduction in inventory at its cost of capital of 11%. All cash flows, except for the initial investment and start-up costs, are at the end of the year. Assume 365 days in a year.
REQUIRED
Use a spreadsheet to perform a feasibility analysis to determine whether Rossco should purchase the computer. Compute the following as part of the analysis: intial investment, after-tax cash flows for years 1 through 4, payback period, net present value, and internal rate of return.