A manager of Cascade Mutual Funds is contemplating acquiring servers to operate its website. The servers will

Question:

A manager of Cascade Mutual Funds is contemplating acquiring servers to operate its website. The servers will cost $660,000 cash and will have zero terminal salvage value. The recovery period and useful life are both 3 years. Annual pretax cash savings from operations will be $300,000. The income tax rate is 40%, and the required after-tax rate of return is 12%.

1. Compute the NPV, assuming straight-line depreciation of $220,000 yearly for tax purposes. Should Cascade acquire the computers? Explain.

2. Suppose the computers will be fully depreciated at the end of year 3 but can be sold for $90,000 cash. Compute the NPV. Should Cascade acquire the computers? Explain.

3. Ignore number 2. Suppose the required after-tax rate of return is 8% instead of 12%. Should Cascade acquire the computers? Show computations.

Mutual Funds
Mutual funds are like a pool of funds gathered by different small investors that have simalar investment perspective about returns on their investments. These funds are managed by professional investment managers who act smartly on behalf of the... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...