Question
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 using 100% bonus depreciation 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 depreciated using 100% bonus depreciation. 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 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 taxes) for its production life.
Rauzi has a 30% tax rate and requires a 20% return on this investment. Use NPV and determine if they should invest. SHOW ALL WORK!
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