The Leontif Company is evaluating the purchase of a new computer for its marketing department, replacing its existing computer. The current computer is fully depreciated and has little or no resale value. The new computer would cost $40,000 and would be depreciated for tax purposes as a 5-year asset using MACRS. The new computer would not enhance revenues but would reduce expenses due to increased operating efficiency. It is expected that the computer would be used for four years, at which time it would have a resale value of $1,000.
The Leontif Company’s income is taxed at 37%. Leontif requires projects with similar risk to provide a return of 10%. What would the amount of expense reduction have to be in order for this computer to be considered attractive to Leontif? Assume that any expense reduction is the same for each year of operating this new computer.LO2