Closs Clothing is evaluating the purchase of computerized clothes design software. The software is expected to cost R160 000. It has a useful life of five years and a zero salvage at the end of its useful life. Assume the following depreciation patterns for the asset
Year Deductable percentage
1 20
2 32
3 19
4 15
5 14
The company’s tax rate is 30 percent, and its cost of capital is 8 percent. The software is expected to generate the following cash savings and cash expenses Cash savings 60 000 YR 1 , 67 000 YR 2, 72 000 YR 3, 60 000 YR 4, 49 000 YR 5 Cash expenses R9000 yr 1, 7000 yr 2, 13000 yr 3, 8000 yr 4 and 5000 yr 5
Required: 5.1. Calculate the net present value. (8)
5.2. Calculate the payback time. (3) 5.3. Calculate the profitability index. (3)
5.4. Discuss the appropriateness of making such investment. (3)
5.5. What other factors should the company consider in evaluating this investment?
