Reference no: EM132435804
Question - Company X is considering replacing a point-of-sale system that is currently being used. The old system is fully depreciated but can be used for another 4 years, at which time it would have no salvage value. Company X can sell the old system for $45,000 on the date that the new system is purchased. Company X has an effective tax rate of 35%, so the gain on the sale of the old system will be fully taxable.
If the purchase occurs, the new system will be acquired for a cash payment of $139,000. Because of the increased efficiency of the new system, estimated annual cash savings of $23,000 would be generated during its useful life of 8 years. Repairs costing $3,500 each are expected in years 3 and 5. The new system is expected to have a salvage value of $9,000, which would be fully taxable because the MACRS book value would be zero.
Company X has a minimum required rate of return of 18% and uses MACRS depreciation. The system falls into the five year asset category with the half-year convention which has the following depreciation rates:
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Year
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Rate
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1
|
14.29%
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2
|
24.49%
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3
|
17.49%
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4
|
12.49%
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5
|
8.93%
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6
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8.92%
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7
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8.93%
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8
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4.46%
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Answer the following questions:
1) What is the net present value of replacing the old system with the new system?
2) What is the internal rate of return for the new system?
3) What is the payback period for the new system?
4) Should Company X purchase the new system? Why or why not?
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