Question
The management of Kimco is evaluating the possibility of replacing their large mainframe computer with a modern network system that requires much less office space.
The management of Kimco is evaluating the possibility of replacing their large mainframe computer with a modern network system that requires much less office space. The network would cost $660,000 (including installation costs) and would save $170,000 per year in net cash flows (accounting for taxes and depreciation) in Year 1-3, $16,000 in year 4, and $150,000 in year 5 due to efficiency gains. The current mainframe has a remaining book value of $80,000 and would be immediately sold for $60,000. Kimcos discount rate is 10%, and its tax rate is 25%. Based on NPV, should management install the network system?
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