стр. 113 
21,000 0.794 16,674
3
4 0.735 15,435
21,000
Net present value $ 17,579
240 CAPITAL BUDGETING (INCLUDING LEASING) [CHAP. 8
Computerized Bookkeeping and NPV Analysis. A mediumsized index manufacturing company
8.25
is considering the purchase of a small computer in order to reduce the cost of its dataprocessing
operations. At the present time, the manual bookkeeping system in use involves the following
direct cash expenses per month:
Salaries $7,500
1,700
Payroll taxes and fringe benefits
 600
Forms and supplies

$9,800
Existing furniture and equipment are fully depreciated in the accounts and have no salvage
value. The cost of the computer, including alterations, installation, and accessory equipment, is
$100,000.This entire amount is depreciable for incometax purposes on a doubledeclining basis
at the rate of 20 percent per annum.
Estimated annual costs of computerized data processing are as follows:
$lS,000
Supervisory salaries
24,000
Other salaries
Payroll taxes and fringe benefits 7,400
Forms and supplies 7,200
$53,600
The computer is expected to be obsolete in 3 years, at which time its salvage value is expected
to be $20,000.The company follows the practice of treating salvage as inflow at the time it is likely
to be received.
1. Compute the savings in annual cash expenses after taxes.
2. Decide whether or not to purchase the computer, using the net present value method.
Assume a minimum rate of return of 10 percent after taxes.
SOLUTION
Annual cash expenses of the manual bookkeeping
1.
machine system, $9,800 X 12 $117,600
Annual cash expenses of computerized data processing 53,600
Annual cash savings $ 64,000
Year 1 Year 2 Year 3
$6WoO
$64,000
Annual cash savings (a) $64,OOO
KO00
Depreciation 20,oOo 12,800
$44,oOo $51,000
Inflow before tax $48,000
Income tax (50%) (b) 22,000 24,O00 25,600
Cash inflow after tax (ab) $42,000 $40,000 $38,400
241
CHAP. 81 CAPITAL BUDGETING (INCLUDING LEASING)
AftepTax
2.
PV Factor PV
Cash Inflow
$ 38,178
Year 1 $42,000 0.909
X
40,000 0.826
Year 2 33,040
X
28,800
38,400 0.750
Year 3 X
20,000 0.750
Year 3 Salvage 15,Ooo
X
15,600* 0.750 11,700
Year 3 Tax loss X
$126,718
1 0O O
0, O
Investment (I)
$ 26,718
Net present value (NPV)
*The $15,600 tax benefit of the loss on the disposal of the computer at the end of year
3 is computed as follows:
Estimated salvage value $ 20,000
Estimated book value:
Historical cost $1 00,000
Accumulated depreciation 51,200
48,800
$( 31,200)
Estimated loss
Tax rate 50%
Tax effect of estimated loss $(15,600)
Since the net present value is positive, the computer should be purchased replacing the manual
bookkeeping system.
IRR. The Michener Company purchased a special machine 1year ago at a cost of $12,000. At
8.26
that time, the machine was estimated to have a useful life of 6 years and no disposal value. The
annual cash operating cost is approximately $20,000.
A new machine that has just come on the market will do the same job but with an annual
cash operating cost of only $17,000. This new machine costs $15,000 and has an estimated life of
5 years with no disposal value. The old machine could be used as a tradein at an allowance of
$5,000. Straightline depreciation is used and the companyвЂ™s income tax rate is 40 percent.
Compute the internal rate of return on the new investment.
SOLUTION
(1) The initial outlay:
outflows:
$15,000
Cost of machine
Inflows:
5,OOO
Salvage value  old machine
Tax savings from loss on sale of
old machine
2.000
($10,000  $5,000)(0.4)
$ 8,000
242 CAPITAL BUDGETING (INCLUDING LEASING) [CHAP. 8
стр. 113 