1. The UFRO Company is considering the replacement of an existing computer with a new computer; faster and with expanded capacity.  If the new computer is purchased, the existing (old) computer will be sold for $80,000.  The existing computer was purchased two years ago (T=-2) for $200,000.  It is being depreciated over its five-year life using the 3-year MACRS schedule.  It is expected to salvaged for $50,000 (T=3). 

 

The new computer will be purchased for $500,000.  If the new computer is purchased, accounts receivable decrease immediately by $20,000; inventory will decrease immediately by $40,000; and accruals will decrease immediately by $30,000.  The UFRO Company has a 30% corporate tax rate.  The modification to the building, paid by UFRO, will cost $80,000.

 

If the new computer is purchased, sales in year 1 will be $600,000, sales in year 2 will be $700,000, and sales in year 3 will be $800,000.  Without the new computer, sales in each year will be $400,000.  Operating expenses will be 50% of sales with the new computer; they are 60% of sales with the old computer.  The new computer will be depreciated using the 3-year MACRS schedule [yr.1: 33%; yr. 2: 45%; yr. 3:15%; yr. 4: 7%].  The new computer will be sold, however, after three (3) years for $100,000. 

The UFRO Company has a cost of capital of 8%. 

CALCULATE THE NPV, IRR, MIRR AND COMMENT ON WHAT GIVES YOU PAUSE WITH RESPECT TO YOUR INVESTMENT DECISION.