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?
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NPV of the project is calculated. The annual and accumulated depreciation are also determined in the solution.