Suggested answers to discussion questions
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| 20.5. Rossco is considering the purchase of a new computer with the following estimated costs: initial systems design, $54,000; hardware, $74,000; software, $35,000, one-time initial training, $11,000; system installation, $20,000; and file conversion, $12,000. A net reduction of three employees is expected, with average yearly salaries of $40,000. The system will decrease average yearly inventory by $150,000. Annual operating costs will be $30,000 per year.
The expected life of the machine is four years, with an estimated salvage value of zero. The effective tax rate is 40%. All computer purchase costs will be depreciated using the straight-line method over its four-year life. Rossco can invest money made available from the reduction in inventory at its cost of capital of 11%. All cash flows, except for the initial investment and start-up costs, are at the end of the year. Assume 365 days in a year. Use a spreadsheet to perform a feasibility analysis to determine if Rossco should purchase the computer. Compute the following as part of the analysis: initial investment, after-tax cash flows for years 1 through 4, payback period, net present value, and internal rate of return. Rossco should proceed with the purchase. The internal rate of return of 23.23% is higher than the hurdle rate of 11%. There is a positive NPV of $56,157. Payback is in 2.44 years. 
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