You ask your recent MBA hire to evaluate the attractiveness of an investment in a piece of computer equipment you've been interested in. He gives you the following report. (Assume that he at least collected all the figures correctly.) The equipment cost $150,000 and will be straight-line depreciated over 5 years. It will replace an existing system -- that would otherwise be used for the five years -- which has been fully depreciated and could be sold for $3,000. It requires the use of software, which the firm has recently purchased for $20,000. The equipment will improve efficiency, which will allow you to cut costs by $60,000/year. The maintenance of the product requires the time of 1/10th of an employee with salary $30,000 and who generates $50,000 of profits to the firm. An additional $5,000 must be reserved for operations. You know that you can sell this product after 5 years for $50,000. Your firm is taxed at 30%. Last year, your firm had a price increase of 15%. You also know that firms who are only in this no-growth business are trading at a P-E multiple of 10. You receive the following analysis with a recommendation against the investment:

0 1 2 3 4 5

--- --- --- --- --- ---

Cost Savings 60 60 60 60 60

Maintenance -3 -3 -3 -3 -3

Buy Eqpt -150 50

Sell Old 3

OppCost of

150K at 15% -22 -22 -22 -22 -22

Depreciation -20 -20 -20 -20 -20

Software -20

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EBIT -167 15 15 15 15 65

Taxes 4.5 4.5 4.5 4.5 19.5

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Net CF -167 11 11 11 11 46

IRR<0Is this analysis correct? If not, where did your MBA go wrong? Redo the analysis to determine whether you should invest in the new equipment.