Forrester Fashions is considering the purchase of computerized clothes designing software. The software is expected to cost $160,000, have a useful life of five years, and have a zero salvage value at the end of its useful life. Assume tax regulations permit the following depreciation patterns for this asset:
|
Year |
Percent Deductible |
|
|
1 |
20 |
|
|
2 |
32 |
|
|
3 |
19 |
|
|
4 |
15 |
|
|
5 |
14 |
The company’s tax rate is 30 percent, and its cost of capital is 8 percent. The software is expected to generate the following cash savings and cash expenses:
|
Cash |
||
|
Year |
Cash Savings |
Expenses |
|
1 |
$60,000 |
$ 9,000 |
|
2 |
67,000 |
7,000 |
|
3 |
72,000 |
13,000 |
|
4 |
60,000 |
8,000 |
|
5 |
49,000 |
5,000 |
a. What is the minimum amount by which net annual cash revenues must increase to make this an acceptable investment?
b. Determine the following on an after tax basis: payback period, net present value, profitability index, and internal rate of return.