Question

You are considering the purchase of a computer system in your bike shop. The system costs $40,000 and can be depreciated using straight line depreciation over four years to zero value. The system will be worthless after 4 years. Because of marketing and accounting efficiencies, you expect the pretax operating cost savings would be 15000 each year you have the computers. The tax rate is 34% and the firm's required return is 15%. Should you purchase the computers?

Answer 1

The question asks for an investment analysis to determine the viability of purchasing a computer system for a bike shop, taking into account depreciation, tax savings, and required return rate.

Step-by-step explanation:

The student is considering whether to purchase a computer system for a bike shop. With a cost of $40,000 that can be depreciated over four years using straight-line depreciation to a zero value, an analysis is needed to determine if the investment is viable considering the tax savings and the required rate of return. The pre-tax operating cost savings of $15,000 per year and a tax rate of 34% must be factored into a net present value (NPV) calculation or similar investment appraisal technique to determine if the computer system's benefits outweigh the costs, considering the firm's required return of 15%.