Replace a computer system with a new model

Reference no: EM13726500

TelCo must decide whether to replace a computer system with a new model. TelCo forecasts net before tax cost savings from the new computer over five years as given below (in $000). It has a 12 percent cost of capital, a 35 percent tax rate, and uses straight line depreciation.

Year 1 2 3 4 5
($) 350 350 300 300 300

a. The new computer costs $1 million but TelCo is eligible for a 15 percent investment tax credit (ITC) in the first year. The ITC reduces Telco's taxes by an amount equal to 15 percent of the equipment's purchase price. In addition, the old computer can be sold for $450,000. If the old computer originally cost $1.25 million and is three years old (depreciable, not economic, life is five years), what is the net investment required in the new system? Assume that there was no ITC on the old computer and that both computers are being depreciated to a zero salvage value.

b. Estimate the incremental operating cash flows associated with the new system.

c. If the new computer's salvage value at the end of five years is projected to be $100,000, should TelCo purchase it?

Reference no: EM13726500

Questions Cloud

Cryptography : Give your opinion of whether cryptography should be a part of every email security strategy or if there are specific characteristics of organizations where such measures are not needed. Justify your answer.

Market performance in the united arab emirates : The significant of Securities in the United Arab Emirates, Market performance in the United Arab Emirates

Corporate strategies are divided to long-term and short-term : Corporate Strategies are divided to long-term and short-term.

Prepare a pppt on health care reform : Health care reform is a topic that is likely to be debated for a long time to come. Imagine yourself as a crafter of health care solutions for this county and you are charged with presenting your solution to a bipartisan group of citizens and legi..

Replace a computer system with a new model : TelCo must decide whether to replace a computer system with a new model. TelCo forecasts net before tax cost savings from the new computer over five years as given below (in $000). It has a 12 percent cost of capital, a 35 percent tax rate, and..

How to create an email newsletter : Read the following articles: 15 Email Newsletter Examples We Love Getting in Our Inboxes, How to Create an Email Newsletter [Checklist]

Data warehousing design : Update the project plan from Project Deliverable 2: Business Requirements, with three to five (3-5) new project tasks each consisting of five to ten (5-10) sub-tasks.

Calculate the amount of additional funds : 1. Please complete the forecast for three years of the income statement and the balance sheet, using the spreadsheet. 2. Calculate the amount of additional funds needed for each of the three years.

Derive demand curves for ggcs product in each market : Derive GGC's marginal revenue (MR) and marginal cost (MC) curves in each market. Show graphically GGC's demand, MR, and MC curves for each market.

User Account

All Pages