eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $41,000 to purchase and install and $25,000 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing inventories by $46,000 per year. The firms cost of capital (discount rate) is 11%.

Required:

1. What is the net present value (NPV) of the proposed investment under each of the following independent situations? (Use the appropriate present value factors from Appendix C, TABLE 1 and Appendix C, TABLE 2.)

1a. The firm is not yet profitable and therefore pays no income taxes.

Net present value

1b. The firm is in the 21% income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules do not apply.

	Net present value

1c. The firm is in the 21% income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB depreciation rate is 50% (i.e., 2 25%). In year four, record depreciation expense as the net book value (NBV) of the asset at the start of the year.

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Year	Pre-Tax Cash Inflows	DDB Depreciation Expense	Taxable Income	Income Taxes	After-tax Net Cash Inflow	Discount Factor	Present Values
0
1
2
3
4
					Net present value (NPV) =		$0

2. What is the internal rate of return (IRR) of the proposed investment for situations in requirement 1, parts (a) through (c)? Use the IRR builit-in function in Excel to compute the IRR.

	Estimated IRR
a.		%
b.		%
c.		%