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A consulting firm is considering the purchase of a new computer system for...

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Accounting

  1. A consulting firm is considering the purchase of a new computer system for their enterprise management needs. A vendor has quoted a purchase price of $240,000.

    The consulting firm plans to borrow one-fourth of the purchase price from a bank at 8% compounded annually. The loan is to be repaid in equal annual payments over a six year period. The remainder of the purchase price is available through other funding sources (e.g. not a loan or money that must be repaid).

    The computer system is expected to last eight years and has a salvage value of $8,000 at that time.

    During the 8-year period, the consultant firm also expects to pay a technician $25,000 per year to maintain the system but will also save an estimated $55,000 per year through increased efficiencies in operations.

    The consulting firm project manager has determined that a MARR of 12%/year should be used to evaluate this investment project.

    What is the external rate of return for the investment project? Should the new computer system be recommended for purchase?

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