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MAIRS Rossco is considering the purchase of a new computer with the following estimated costs: Initial Systems design, $37,500; hardware, $ 60,000; software, $30,000, one-time
MAIRS Rossco is considering the purchase of a new computer with the following estimated costs: Initial Systems design, $37,500; hardware, $ 60,000; software, $30,000, one-time initial training, $ 10,000; system installation, $ 10,000; and file conversion, $ 10,000. A net reduction of three employees is expected, with average yearly salaries of $ 40,000. The system will decrease average yearly inventory by $ 150,000. Annual operating costs will be $ 30,000 per year. The expected life of the machine is three years, with an estimated salvage value of zero. The effective tax rate is 40%. All computer purchase costs will be depreciated using the straight-line method over its three-year life. Rossco can invest money made available from the reduction in inventory at its cost of capital of 10%. All cash flows, except for the initial investment and start-up costs, are at the end of the year. Assume 365 days in a year. Questions: (a) Use feasibility analysis that performs to deterniine if Rossco should purchase the computer. Compute the following as part of the analysis: Initial investment, after tax cash flows for years I through 3, net present value, internal rate of return. (b) Interpret your decision from findings
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