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Joey's Tax Service prepares returns for individuals and small businesses in the Lexington, Kentucky area. Joey employs four people in his tax practice. Currently,
Joey's Tax Service prepares returns for individuals and small businesses in the Lexington, Kentucky area. Joey employs four people in his tax practice. Currently, all tax returns are prepared on a manual basis. Joey is considering purchasing a computer system that would allow the firm to service all its existing clients with the use of only three employees. To evaluate the feasibility of the computerized system, Joey has gathered the following information: Initial cost of the hardware and software $50,000 Expected salvage values: After 3 years After 4 years After 5 years Annual depreciation Annual labour savings Expected life of the computer system Joey's cost of capital Required: Show all computations. 10,000 8,000 4,000 10,000 13,000 5 years 8% a. Compute the payback period for this investment, assuming the equipment will be kept for five years. (2 marks) b. Considering the time value of money, what is the maximum amount that Joey could pay for the computer system and still recover the investment in 3 years? (6 marks) c. Compute the internal rate of return (IRR) for the project, assuming the equipment will be kept for five years. (10 marks). 1
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