Question

In: Accounting

A new computer system will require an initial outlay of $19,250, but it increase the firm's...

A new computer system will require an initial outlay of $19,250, but it increase the firm's cash flows by $4,100 a year for the next 7 years. A. Calculate the NPV and decide if the system is worth installing if the required rate of return is 10%. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.) b. Calculate the NPV and decide if the system is worth installing if the required rate of return is 15%. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)

Solutions

Expert Solution

A. NPV at required return 10%
NPV=Initial investment+PV of annual cashflows for 7 yrs. Discounted at the required rate of return
ie. -19250+(4100*4.86842)=                                                   (P/A,4100 ;i=10%; n=7 )
710.52
It is worth installing the system as the NPV of its cash flows is POSITIVE
b.NPV at required return 15%
ie. -19250+(4100*4.16042)=                                                   (P/A,4100 ;i=15%; n=7 )
-2192.278
It is NOT worth installing the system as the NPV of its cash flows is NEGATIVE

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