Spending Money to Save Money? For help on this one, refer back to the computerized inventory management system in Example 10.3. Here, we’re contemplating a new automatic surveillance system to replace our current contract security system. It will cost $450,000 to get the new system. The cost will be depreciated straight-line to zero over the system’s four-year expected life. The system is expected to be worth $250,000 at the end of four years after removal costs.
We think the new system will save us $125,000, before taxes, per year in contract security costs. The tax rate is 34 percent. What are the NPV and IRR on buying the new system? The required return is 17 percent.