SrCase for Section I 38.ce0 23 THE VILLARD ELECTRIC COMPANY The financial manager of the Villard Electric Company, Fred Taylor, has presented his estimates of cash flows resulting from the possible investment in a new computer system, the Webnet. Mr. Taylor's estimates of net cash flows immediately and over the following four years are as follows: base vear Purchase of Sale of computer syslenm Tax on sale of computer system Acquisition and disposition cash Bows Change in expenses SO $52,442 $50,000 $50,000 $50,000 $50,000 $11,600 $26,960 S6,400-58,960 $7,424 $17,254 $10,000-$14 Change in taxable income a change in tax v Change in depreciation 40.00064.00038400 23,040 in operating cash fows Change in net cash Bowr -$200.000$46,400 | S55040 | $45,824 | $92,736 Mr. Taylor has based his estimates on the following assumptions: The cost of the system (including installation) is $200,000. The system will be depreciated as a 5-year asset under the MACRS, but it will be sold at the end of the fourth year for $50,000. Villard's expenses will decline by $50,000 in each of the four -The company's tax rate will be 36%. Working capital will not be affected When he made his presentation to Villard's board of direc- tors, Mr. Taylor was asked to perform additional analyses to con- sider the following uncertainties: 47