The CPA practice of Knape, Knape and Knape is considering investing in the complete small business computer system. The initial investment will be $70,000. The computer is in the five year MACRS category, and firm's tax rate is 43%. The computer system is anticipated to provide additional revenue of $32,000 per year for next six years, and to reduce expenses by $7,000 for each year for the same period.
a) Compute the net after-tax cash flows from this investment.
b) Compute the net present value of the system, given that the law firm's weighted average cost of capital is 12%. Calculate IRR in Excel using IRR formula.
c) Should they purchase the computer system?