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The Rauzi Company is looking to replace an existing computer system with a new, more efficient system. They feel the new will increase cash flow.
The Rauzi Company is looking to replace an existing computer system with a new, more efficient system. They feel the new will increase cash flow. The new system will cost $435, 000 today and have a 4 year production life. It will be depreciated as 5-year MACRS property with an estimated salvage value of $175, 000 at the end of its production life. The project will also set aside $15, 000 for working capital. The old computer is currently two years old and had an estimated production life of six years. It originally cost $305, 000 and was being depreciated as 5-year MACRS property. It could be sold for $150, 000 today and we estimated that if kept, we would sell it for $25, 000 at the end of its production life. The new is estimated to produce revenue of $250, 000 per year and have expenses of $75, 000 per year (excluding depreciation and taxes) for its production life. The old was expected to produce revenue of $135, 000 per year and have expenses of $85, 000 per year (excluding depreciation and taxes) for its production life. Rauzi has a 35% tax rate and requires a 20% return on this investment. Use NPV and determine if they should invest. Also determine the profitability index and the internal rate of return
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