+
TelCo must decide whether to replace a computer system with a new model

TelCo must decide whether to replace a computer system with a new model

Rating:
Rating
(0)
Author: Jean Brunner
Description:

http://homework.plus/telco-must-decide-whether-to-replace-a-computer-system-with-a-new-model/

TelCo must decide whether to replace a computer system with a new model. TelCo forecasts net before tax cost savings from the new computer over five years as given below (in $000). It has a 12 percent cost of capital, a 35 percent tax rate, and uses straight line depreciation.
Year1234 5
($) 350 350 300 300 300
a.The new computer costs $1 million but TelCo is eligible for a 15 percent investment tax credit (ITC) in the first year. The ITC reduces Telco’s taxes by an amount equal to 15 percent of the equipment’s purchase price. In addition, the old computer can be sold for $450,000. If the old computer originally cost $1.25 million and is three years old (depreciable, not economic, life is five years), what is the net investment required in the new system? Assume that there was no ITC on the old computer and that both computers are being depreciated to a zero salvage value.
b.Estimate the incremental operating cash flows associated with the new system.
c.If the new computer’s salvage value at the end of five years is projected to be $100,000, should TelCo purchase it?


(more)
See More
Try a College Course Free

Sophia’s self-paced online courses are a great way to save time and money as you earn credits eligible for transfer to over 2,000 colleges and universities.*

Begin Free Trial
No credit card required

25 Sophia partners guarantee credit transfer.

221 Institutions have accepted or given pre-approval for credit transfer.

* The American Council on Education's College Credit Recommendation Service (ACE Credit®) has evaluated and recommended college credit for 20 of Sophia’s online courses. More than 2,000 colleges and universities consider ACE CREDIT recommendations in determining the applicability to their course and degree programs.

Tutorial