Reference no: EM132945451

Sinar, Inc., a south eastern advertising agency, is considering the purchase of new computer equipment and software to enhance its graphics capabilities. Management has been considering several alternative systems, and a local vendor has submitted a quote to the company of RM15,000 for the equipment plus RM16,800 for software. Assume that the equipment can be depreciated for tax purposes over three years as follows: year 1, RM5,000; year 2, RM5,000; year 3, RM5,000. The software can be written off immediately for tax purposes. The company expects to use the new machine for four years and to use straight-line depreciation for financial reporting purposes. The market for used computer systems is such that Sinar Inc. could sell the equipment for RM2,000 at the end of four years. The software would have no salvage value at that time.

Sinar Inc. management believes that the introduction of the computer system will enable the company to dispose of its existing equipment, which is fully depreciated for tax purposes. It can be sold for an estimated RM200 but would have no salvage value in four years. If Sinar Inc. does not buy the new equipment, it would continue to use the old graphics system for four more years.

Management believes that it will realize improvements in operations and benefits from the computer system worth RM16,000 per year before taxes. Sinar Inc. uses a 10 % discount rate for this investment and has a marginal income tax rate of 40 % after considering both state and federal taxes.

Problem i. Prepare a schedule showing the relevant cash flows for the project.

Problem ii. Indicate whether the project has a positive or negative net present value.