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The management of Kimco is evaluating the possibility of replacing their large mainframe computer with a...

The management of Kimco is evaluating the possibility of replacing their large mainframe computer with a modern network system that requires much less office space. The network would cost $500,000 (including installation costs) and would save $125,000 per year in net cash flows (accounting for taxes and depreciation) over the next five years due to efficiency gains. The mainframe has a remaining book value of $50,000 and would be immediately donated to a charity for the tax benefit. Kimco’s discount rate is 10% and its tax rate is 40%. How do you find the discount factor?

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Answer #1

Ans. Evalualation of proposal of replacing their large mainframe computer with modern network system

Cash outflow: $500000

Cash inflow: Annual net flow = 125000

Discounted cash flow over the 5years time @10%

Cumulative value of discounting factor for 5Yrs @10% = 3.79

Total discounted cash flow for 5yrs (125000X3.79) = $473750

Tax saving of chartiy donation (50000X.4) = $20000

Net relevant cash in flow = 493750   

Net cash flow (493750-500000) =$-6250

Comment:- it is not viable to accept the proposal

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