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 -------------------------------------------------- EBIT -167 15 15 15 15 65 Taxes 4.5 4.5 4.5 4.5 19.5 -------------------------------------------------- Net CF -167 11 11 11 11 46 IRR<0

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 PE multiple of 10. You receive the following analysis with a recommendation against the investment: 0 --- 1 --60 -3 2 --60 -3 3 --60 -3 4 --60 -3 5 --60 -3 50 Cost Savings Maintenance Buy Eqpt -150 Sell Old 3 OppCost of 150K at 15% -22 -22 -22 -22 -22 Depreciation -20 -20 -20 -20 -20 Software -20 -------------------------------------------------EBIT -167 15 15 15 15 65 Taxes 4.5 4.5 4.5 4.5 19.5 -------------------------------------------------Net CF -167 11 11 11 11 46 IRR<0