Western Power is considering the replacement of an old billing system
with new software that should save $5,000 per year in net cash operating
costs. The old system has zero disposal value, but it could be used for the next
12 years. The estimated useful life of the new software is 12 years and it will
cost $25,000.
1. What is the payback time?
2. Compute the internal rate of return.
3. Management is unsure about the useful life. What would be the internal
rate of return if the useful life were (a) six years instead of 12, and
(b) 20 years instead of 12?
4. Suppose the life will be 12 years, but the savings will be $3,000 per
year instead of $5,000. What would be the rate of return?

5. Suppose the annual savings will be $4,000 for eight years. What would
be the rate of return?