3. 10.3 Spending money to save money? For help on this one, refer back to the computerised inventory management system in Example 10.3.

Here, we are contemplating a new automatic surveillance system to replace our current contract security system. It will cost $450 000 to get the new system. The cost will be depreciated straight-line to zero over the system’s four-year expected life. The system is expected to be worth $250 000 at the end of four years after removal expenses.

We think the new system will save us $1 25 000 per year, before taxes, in contract security costs. The tax rate is 30 per cent. What are the NPV and IRR for buying the new system? The required return is 17 per cent.