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# Capital Budgeting on Excel

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Three Rivers Company runs clothing stores in the Pittsburg area. Three Rivers' management estimates that if it invests \$250,000 in a new computer system, it can save \$75,000 in annual cash operating costs. The system has an expected useful life of ten years and no terminal Disposal value. The required rate of return is 8%. Ignore income taxes and assume all cash flows occur at year-end except for initial investment amounts to calculate the following:
1. Net present value
2. Payback period
3. Discounted payback period
4. Internal rate of return (using the interpolation method)
5. Accrual accounting rate of return based on the net initial investment (assume straight-line depreciation)
6. What other factors should Three Rivers consider in deciding whether to purchase the new computer system?
7. Should they purchase the new system? Why or why not?

#### Solution Summary

Three Rivers Company runs clothing stores in the Pittsburg area. Three Rivers' management estimates that if it invests \$250,000 in a new computer system, it can save \$75,000 in annual cash operating costs. The system has an expected useful life of ten years and no terminal Disposal value. The required rate of return is 8%. Ignore income taxes and assume all cash flows occur at year-end except for initial investment amounts to calculate the following:
1. Net present value
2. Payback period
3. Discounted payback period
4. Internal rate of return (using the interpolation method)
5. Accrual accounting rate of return based on the net initial investment (assume straight-line depreciation)
6. What other factors should Three Rivers consider in deciding whether to purchase the new computer system?
7. Should they purchase the new system? Why or why not?

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