A company is considering purchasing a new computerized management information system. The estimated initial investment costs of this system are (1) PCs and printers: $71,000, (2) System installation: $7,000, (3) Testing: $6,000. This system is classified as a 5-year MACRS class. This system is expected to last 6 years, which is the project duration. At the end of 6 years, the system will be sold for $1000.
During the first year of the project, company engineers must spend time to customize software for this project at a cost of $20,000. There will also be some additional operating and maintenance costs of $12,000 annually for the duration of the project.
This new system will provide savings by eliminating the waste of manually double-checking data and better tracking of billing – the savings is estimated to be $52,000 annually for the duration of the project.
The company will borrow all the money for the initial investment from a local bank. The bank interest rate is 11% and the company will pay it off over the first 5 years of the project with equal annual payments.
The company’s marginal tax rate over the next 6 years is 39% and this project is not expected to change that rate. The company’s minimum attractive rate of return is 18%.
Using a present worth analysis of the cash flows from this project, is this project acceptable to the company?