The Law Firm of Bushmaster, Cobra and Asp Is Considering

question 48

Essay

The law firm of Bushmaster, Cobra and Asp is considering investing in a complete small business computer system. The initial investment will be $35,000 and the hardware, which will be used for 10 years with a salvage value of $5,000, and software of $20,000. In each of years 3, 5, and 7, $5,000 will be spent for additional software. Hardware has a CCR rate 45 percent and software is class 12 (100 percent).
The computer system is expected to provide additional revenue of $15,000 per year for the next 10 years, and to reduce expenses by $10,000 per year for the same period.
The firm's cost of capital is 12 percent and its tax rate is 40 percent. Based on a net present value analysis, should this investment be accepted? $\begin{array}{llccc}\text { Time }&\text { Event } &\text { Cash flow } &\text { Aftertax cash flow } & \text { Present value }\\ 0 & \text { Purchase hardware } & (\$ 35,000) & \text { - } & (\$ 35,000) \\0 & \text { Purchase software } & (20,000) & \text { - } & (20,000) \\ 1-10 & \text { Cash flow } & 25,000 & 15,000 & 84,753 \\3 & \text { Purchase software } & (5,000) & \text { - } & (3,559) \\5 & \text { Purchase software } & (5,000) & \text { - } & (2,837) \\ 7 & \text { Purchase software } & (5,000) & \text { - } & (2,262) \\10 & \text { Salvage } & 5,000 & \text { - } & 1,610 \\ \text {-- } & \text { PV (CCA) hardware } & \text { - } & \text { - } & 9,979 \\ \text {- } & \text { PV (CCA) software } & \text {- } & \text {-} & 9.687 \\&\text { Net present value }&&&\$42,671\end{array}$

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Definitions:

Natural Gas

A fossil fuel consisting mainly of methane, used as an energy source for heating, cooking, and electricity generation, as well as a fuel for vehicles.

High Tax Rate

The proportion of income or revenue taken by the government through taxes is considered to be above average or burdensome.

Decimal System

A numerical system based on 10, particularly used in mathematics and denoting numbers using a point to separate the integer part from the fractional part.

Major Sections

The primary divisions of a document, presentation, or work of writing, organized to enhance clarity and structure.