(Payback; IRR) Excel Tax Service prepares tax returns for individuals and small businesses. The firm employs four professional people in the tax practice. Cur¬ rently, all tax returns are prepared on a manual basis. The firm’s owner, Joseph Harraba, is considering purchasing a computer system that would allow the firm to service all its existing clients with the use of only three employees. To evaluate the feasibility of the computerized system, Joseph has gathered the following information:

Joseph has determined that he will invest in the computer system if its pretax payback is less than 3.5 years and its pretax IRR exceeds 12 percent.

a. Compute the payback period for this investment. Does the payback meet Joseph’s criterion? Explain.

b. Compute the IRR for this project to the nearest .5 percent. Based on the computed IRR, is this project acceptable to Joseph?

Transcribed Image Text:

Initial cost of the hardware and software Expected salvage value in 4 years Annual depreciation Annual operating costs Annual labor savings $45,000 0 10,000 6,500 23,000 Expected life of the computer system 4 years