Question
Tassie Premium Beer (TPB) is considering updating its current manual accounting system with a high-end electronic system. While the new accounting system would help the
Tassie Premium Beer (TPB) is considering updating its current manual accounting system with a high-end electronic system. While the new accounting system would help the company save some money, the cost of the system continues to decline over time. TPBs opportunity cost of capital is 10 per cent, and the costs and values of investments made at different times in the future are as follows:
Year | Cost | Value of Future Savings (At time of purchase) |
0 | $5,000 | $ 7,000 |
1 | 4,500 | 7,000 |
2 | 4,000 | 7,000 |
3 | 3,600 | 7,000 |
4 | 3,300 | 7,000 |
5 | 3,100 | 7,000 |
Required A - Using an NPV analysis for each alternative in which year should TPB buy the new accounting system and why? B - It is sometimes stated that the net present value approach assumes reinvestment of the intermediate cashflows at the required return. Is this claim correct? How is it different from the IRR approach? Explain in your own words.
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