A firm has been paying a print shop $18.500 annually to print the company's monthly newsletter. The agreement with this print shop has now expired, but it should be renewed for another five years. The new sub-contacting charges are expected to be 12% higher than were under the previous contract. The company is also considering the purchase of a desktop publishing system with a high-quality laser printer driven by a microcomputer. With appropriate text and graphics software, the newsletter can be composed and printed in near-typeset quality. A special device is also required to print photos in the newsletter. The following estimates have been quoted by a computer vendor.
Personal computer....................................... $4,500
Color laser printer........................................ 6,500
Photo device/scanner.................................... 5,000
Software................................................... 2,500
Total cost basis............................................ $18,500
Annual O&M costs....................................... $15,000
The salvage value of each piece of equipment at the end of five years is expected to be only 10% of the original cost. The company's marginal tax rate is 40%, and the desktop publishing system will be depreciated by MACRS under its five-year property class.
(a) Determine the projected net after-tax cash flows for the investment.
(b) Compute the IRR for this project.
(c) Is the project justifiable at MARR = 12%?