Logical Context Ltd, a southeastern advertising agency, is considering the purchase of new computer equipment and software to enhance its graphics capabilities. Management has been considering several alternative systems, and a local vendor has submitted a quote to the company of sh. 15000 for the equipment plus sh. 16800 for software. Assume that the equipment can be depreciated for tax purposes over three years as follows:

Year 1 Sh. 5000

Year 2 Sh. 5000

Year 3 Sh. 5000

The software can be written off immediately for tax purposes. The company expects to use the new machine for four years and to use straight-line depreciation for financial reporting purposes. The market for used computer systems is such that Logical Contexts could sell the equipment for sh. 2000 at the end of four years. The software would have no salvage value at that time.

Logical Context Management believes that the introduction of the computer system will enable the company to dispose of its existing equipment, which is fully depreciated for tax purposes. It can be sold for an estimated 200 shillings but would have no salvage value in four years. If Logical Context does not buy the new equipment, it would continue to use the old graphics system for four more years. Management believes that it will realize improvements in operations and benefits from the computer systems worth 16000 shillings per year before taxes.

Logical Context uses a 10% discount rate for this investment and has a marginalLtdome tax rate of 40% after considering both state and federal taxes.

a) Prepare a schedule showing the relevant cash flows for the project

b) Indicate whether the project has a positive or negative net present value and how much