Nguyen, Inc., is considering the purchase of a new computer system (ICX) for $130,000. The system will require an additional $30,000 for installation.
If the new computer is purchased, it will replace an old system that has been fully depreciated. The new system will be depreciated under the MACRS rules applicable to 7-year class assets. If the ICX is purchased, the old system will be sold for $20,000. The ICX system, which has a useful life of 10 years, is expected to increase revenues by $32,000 per year over its useful life.
Operating costs are expected to decrease by $2,000 per year over the life of the system. The firm is taxed at a 40 percent marginal rate. (Hint: See Appendix 9A for information on MACRS depreciation. Except for the depreciation method, this problem is the same as problem 10.)
a. What net investment is required to acquire the ICX system and replace the old system?
b. Compute the annual net cash flows associated with the purchase of the ICX system.