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ND Company intends to upgrade its information system or switch to a new information system. Upgrading the old system involves a cost of $97,500 and
ND Company intends to upgrade its information system or switch to a new information system. Upgrading the old system involves a cost of $97,500 and increases the useful life of the system for 7 years. The value of the old system book is $19,500, but it can be sold at $24,000. Upgrading the old system will save the salary of 1 employee by $19,400 a year, while the new system can save the salary of 2 employees. The operating cost is $15,950 per year. Upgrading the old system is expected to increase the profit by 3.5 per cent over the previous year's profit of $553,000. The supplier of the new system quotes the new system at $224,800 with a useful life of 7 years. The operating cost is $14,260 per year. The average speed of a new system is 12% faster than other systems and is expected to increase the company's profitability by 4.5 percent. The corporate tax rate for companies is 35 percent. The cost of capital is 11 percent. After 7 years, the expected scrap value is $12,000 for the new system and $7500 for the upgraded old system. For tax purposes, the information system is depreciated for 5 years with the following depreciation rates: YEAR 1 (%) 20.00 32.00 2 3 19.20 11.52 4 5 11.52 6 5.76 Using worksheet software, provide economic feasibility analysis to determine whether companies should upgrade old information systems, or replace them with new information systems. The analysis will involve the calculation of cash flow after tax for year 1 to 7 as well as the payback period, NPV and IRR for each option. State a summary for your analysis
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