Owen Eyewear is planning to purchase a $520,000 computer system to improve the quality and lead time of its eyewear production. Management estimates that this investment will result in increased annual cash revenues of $280,000 with related operating costs of $57,000. The computer system will be depreciated by the Modified Accelerated Cost Recovery System (MACRS) over a five-year life with no salvage value; however, Owen expects to sell the computer system at the end of Year 5 for $70,000. Determine the net present value (NPV) of this investment opportunity.
Assume a 30% income tax rate and a 12% hurdle rate. Also assume that the asset will be placed in service at the beginning of the fiscal year.
MACRS Rates: Year 1, 20.0%; Year 2, 32.0%; Year 3, 19.2%; Year 4, 11.52%; Year 5, 11.52%; Year 6, 5.76%
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