Mack and Myer, LLP, a law firm, is considering the replacement of its old accounting system with

Question:

Mack and Myer, LLP, a law firm, is considering the replacement of its old accounting system with new software that should save $10,000 per year in net cash operating costs. The old system has zero disposal value, but it could be used for the next 5 years. The estimated useful life of the new software is 5 years with zero salvage value, and it will cost $40,000. The required rate of return is 14%.

1. What is the payback period?

2. Compute the NPV.

3. Management is unsure about the useful life. What would be the NPV if the useful life were?

(a) 3 years instead of 5 or (b) 10 years instead of 5?

4. Suppose the life will be 5 years, but the savings will be $8,000 per year instead of $10,000. What would be the NPV?

5. Suppose the annual savings will be $9,000 for 4 years. What would be the NPV?

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...