A manager of Destination Mutual Funds is contemplating acquiring servers to operate its website. The servers will cost $600,000 cash and will have zero terminal salvage value. The recovery period and useful life are both 3 years. Annual pretax cash savings from operations will be $260,000. The income tax rate is 30%,and the required after-tax rate of return is 12%.

Compute the NPV, assuming straight-line depreciation of $200,000 yearly for tax purposes. Should Destination acquire the computers? Explain.

Present Value of Ordinary Annuity of $1 at 3 years, 12% Annual Cash Total Present Value Inflow Net present value: Present value of annuity of equal annual: After-tax cash flows from operations After-tax cash savings from depreciation Less: Initial investment X per year = per year = Net present value