Contemporary Engineering Economics 6th Edition by Chan Park

Exercise 1

A small children's clothing manufacturer is considering an investment to computerize its management information system for material requirement planning, piece-goods coupon printing, and invoice and payroll services. An outside consultant has been retained to estimate the initial hardware requirement and installation costs. He suggests the following:
The expected life of the computer system is five years with no expected salvage value. The proposed system is classified as a five-year property under the MACRS depreciation system. A group of computer consultants needs to be hired to develop various customized software packages to run on the system. Software development costs will be $20,000 and can be expensed during the first tax year. The new system will eliminate two clerks, whose combined annual payroll expenses are $72,000. Additional annual expenses to run this computerized system are expected to be $15,000. Borrowing is not considered an option for this investment, nor is a tax credit available for the system. The firm's expected marginal tax rate over the next six years will be 35%. The firm's interest rate is 13%. Compute the after-tax cash flows over the life of the investment.