**Due 2 hours from now:**

** **

The CPA practice of Knape, Knape & Knape is considering investing in a complete small business computer system. The initial investment will be $70,000. The computer is in the 5-year MACRS category, and the firm's tax rate is 43%. The computer system is expected to provide additional revenue of $32,000 per year for the next six years, and to reduce expenses by $7,000 per year for the same period.

a) Calculate the net after-tax cash flows from this investment.

b) Calculate the net present value of the system, given that the law firm's weighted average cost of capital is 12%. Compute IRR in Excel using IRR formula.

c) Should they buy the computer system?

Example below:

5-year MACRS category:

20% year 1, 32% year 2, 19.2% year 3, 11.52% year 4, 11.52% year 5, 5.76% year 6

Initial Investment = P = 50,000

Revenue = A = 32,000 + 7,000 = 39,000 (Before Tax Cash Flow -> BTCF)*a) Calculate the net after-tax cash flows from this investment.*

I used this equations to get the values in the table:

Depreciation = Initial Investment * MACR Rate

Taxable Income = BTCF - Depreciation

Tax = Taxable Income * Tax Rate

ATCF = BTCF - Tax**b) Calculate the net present value of the system, given that the law firm's weighted average cost of capital is 12%.**

NPV = - 50,000 + 29,140 (1+12%)^{-1} + 31,180 (1+12%)^{-}^{2} + 29,004 (1+12%)^{-3} + 27,698.4 (1+12%)^{-4 }+ 27,698.4 (1+12%)^{-5 }+ 26,719.2 (1+12%)^{-6}

NPV = - 50,000 + 26,017.86 + 24,856.51 + 20,644.47 + 17,602.83 + 15,716.82 + 13,536.78**NPV = 68,375.26****c) Should they buy the computer system?**

Yes, they should because the NPV of the computers is above 0, which means that they will win money with the buying.

Subject | Business |

Due By (Pacific Time) | 07/27/2013 03:47 pm |

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