Reference no: EM132703638

The Eaton Company is a national manufacturer of consumer goods and is looking at purchasing a new computer system that will result in a reduction in total operating costs. The purchase cost of the computer system is $540,000. This cost will be fully depreciated using the straight line method over the equipment's 5 year life.

At the end of the 5th year, the company plans on selling the computer equipment. While it is unknown at this time how much the equipment can be sold for, management has assigned $80,000 as its potential salvage value. The company's accounting policy is not to subtract salvage value from the purchase cost for purposes of calculating depreciation expense.

Management believes that the new computer system can save the firm $170,000 per year in pre-tax operating costs. These cost savings are considered incremental revenues for the firm. In addition, the computer system requires an initial investment in net working capital of $29,000 which is assumed to be recovered or paid back at the end of the 5th year. The company's tax rate is 34% and its required return on all new capital expenditures is 10%. There are no other new incremental expenses to consider.

1.Calculate the net present value and the internal rate of return for this project. Note the Requirements section below.

2. Should the company accept or reject this project. State Yes or No AND explain why in 2 sentences.

REQUIREMENTS:

You are required to prepare supporting calculations and / or schedules for question # 1 as detailed below. Include them in your submission.

a. Prepare the Pro - forma income statement

b. Calculate the Annual operating cash flow

c. Calculate the After tax salvage value

d. Create schedule showing the project's annual cash flows for year 0 through year 5.

e. Show the keystrokes you used to calculate NPV and IRR.