As Vice-President of Finance for Current Recording Studios, you are considering the purchase of a new computer network for the companys office staff. The existing computer equipment can be sold for a total of $17,000. The equipment was purchased four years earlier for $97,000 and was being depreciated over a five-year period using the MACRS method.

The new computer equipment will cost a total of $83,000, require modifications to the buildings electrical wiring of $2,300, and also will require $3,500 in working capital to support the new equipments operation. The equipment will be depreciated over a 5-year period using MACRS and will have an expected salvage value of $4,500 at the end of its expected economic life of six years.

The company will not deduct the salvage value when calculating depreciation.

The annual savings are expected to be $20,000 per year for each year of the equipments expected six-year life.

Current Recording Studios uses a hurdle rate of 14% for all potential capital budgeting projects and has a marginal tax rate of 35%.

Questions

Determine (1) the net present value, (2) the profitability index, (3) the internal rate of return, and (4) the MIRR. Should the company purchase the new network?