Solitaire Company is planning to purchase a computer server for $400,000 to handle purchase orders from the Internet. Installation for this computer server costs $8,500. It's initial cost, operating costs, income, and salvage value are represented in the following cash flow diagram:
(see attachment for diagram)
This computer server qualifies for 3-year MACRS depreciation (Yr1: 33.33%, Yr2: 44.45%, Yr3: 14.81%, Yr4: 7.41%) and an investment tax credit of 40% in year 1. The company is in the 35% tax bracket. A working capital infusion of $100,000 will be required, and is recovered in the final year of the project. Use an after tax MARR of 15%. Assume that the company has net income from other projects.
a) Find the annual depreciation expense and accumulated depreciation for the server.
Hint: Initial investment includes initial cost plus installation costs.
b) Prepare an after-tax analysis and calculate the after-tax NPV.
c) Should the investment be undertaken? Why?
(See attachment for full question).
NPV of the project is calculated. The annual and accumulated depreciation are also determined in the solution.