A company can automate its payroll department by purchasing a computer. The computer costs $25,000 now, but it may cost only $20,000 next year. The company expects to save $6500 a year during its useful life of 5 years. The discount rate is 12%, and the risk-free rate is 6%. The company uses straight-line depreciation and its tax rate is 30%. Should the company install the computer this year, or next year?

Capital budgeting techniques are used to determine whether the investment is profitable or viable.…

Answered: A company can automate its payroll…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 3P

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A company can automate its payroll department by purchasing a computer. The computer costs $25,000 now, but it may cost only $20,000 next year. The company expects to save $6500 a year during its useful life of 5 years. The discount rate is 12%, and the risk-free rate is 6%. The company uses straight-line depreciation and its tax rate is 30%. Should the company install the computer this year, or next year?

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