The Eaton Company is a national manufacturer of consumer goodsand is looking at purchasing a new computer system that will resultin a reduction in total operating costs. The purchase cost of thecomputer system is $540,000. This cost will be fully depreciatedusing the straight line method over the equipment’s 5 year life. Atthe end of the 5th year, the company plans on selling the computerequipment. While it is unknown at this time how much the equipmentcan be sold for, management has assigned $80,000 as its potentialsalvage value. The company’s accounting policy is not to subtractsalvage value from the purchase cost for purposes of calculatingdepreciation expense. Management believes that the new computersystem can save the firm $170,000 per year in pre-tax operatingcosts. Equally important is that these cost savings can beconsidered the same as incremental revenues for the firm. Inaddition, the computer system requires an initial investment in networking capital of $29,000 which is assumed to be recovered or paidback at the end of the 5th year. The company’s tax rate is 34% andits required return on all new capital expenditures is 10%. Thereare no incremental new expenses to consider.

Question: Calculate the NPV and IRR for this project. Do youaccept or reject this project?

Professor’s Note - To properly do this, you will need to createseveral schedules as follows: 1. Prepare the Pro – Forma IncomeStatement 2. Calculate the Annual Operating Cash Flow 3. Calculatethe After Tax Salvage Value 4. Create a chart showing the Project’sAnnual Cash Flows for Year 0 through Year 5. 5. Calculate NPV andIRR. Show the keystrokes you used