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O’Brien Inc. is considering the purchase of a new computer system (Mac) for $180,000. The system...

O’Brien Inc. is considering the purchase of a new computer system (Mac) for $180,000. The system will require an additional $20,000 for installation. If the new computer is purchased, it will replace an old system that has been fully depreciated. The new system will be depreciated over a period of 5 years using straight-line depreciation. If the Mac is purchased, the old system will be sold for $35,000. The Mac system, which has a useful life of 5 years, is expected to increase revenues by $45,000 per year over its useful life. Operating costs are expected to decrease by $5,000 per year over the life of the system. The firm is taxed at a 25% (marginal rate).

(a)   What is the required Net Investment (NINV) to acquire the Mac system and replace the old system?

(b)    Compute the annual Net Cash Flows associated with the purchase of the Mac system.

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Answer #1

1. Required Net Investment = Purchase cost of MAC + Installation Cost - Old Asset sale price * (1 - Tax)

Required Net Investment = 180000 + 20000 - 35000 * (1 - 0.25)

Required Net Investment = 180000 + 20000 - 26250

Required Net Investment = $173750

2. Annual Net Cash Flows

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