Question
small firm is considering whether to purchase a new computer system for its offices. The immediate cost of this computer system is $5,000. If installed,
small firm is considering whether to purchase a new computer system for its offices. The immediate cost of this computer system is $5,000. If installed, over the next year, the system would yield cost savings of $750 and these cost savings would increase by $250 per year for the following four years. After that time, the new system would not contribute any more cost savings. However, the system would also lead to increased maintenances costs for the next five years, starting at $16 and rising by 25% per year. If the annual interest rate is 6% in years one to three and 10% thereafter, what is the NPV of this project? Should the system be installed?
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