A small children's clothing manufacturer is considering an investment to computerize its management information system for material requirement planning piece-goods coupon printing, and invoice and payroll services. An outside consultant has been retained to estimate the initial hardware requirement and installation costs. He suggests the following:
Workstation servers............................. $20,000
(15 PCs. 4 printers) ............................. 565.000
Local area networking system.................. 15.000
System installation and testing................. 4,000
The expected life of the computer system is five years with no expected salvage value. The proposed is classified as a five-year property under the depreciation system. A group of computer is needs to be hired to develop various customized software packages to run on the system software development costs will be $20.000 and can be expensed during the first tax year. The new system will eliminate two clerks. whose combined annual payroll expenses are $72.000. Additional expenses to run this computerized system are to be $15.000. Borrowing is not considered in option for this investment, nor is a tax credit available for the system. The firm's expected marginal tax rate over the next six years will be 35%. The firm's interest rate is 13%. Compute the after-tax cash flows over the life of the investment.