XHZ accounting firm estimates that new bookkeeping software will increase sales of its accounting services by $450,000 per year for the next 5 years,after which time the software will be outdated and useless.The company has forecast its operating expenses from this new project at $230,000 per year.The licence fees and installation costs on the new software will amount to $640,000,which can be depreciated on a straight- line basis over the five- year life of the project.There is expected to be no salvage value.XHZ pays company tax at a rate of 30% and has no interest expenses.XHZ has a cost of capital of 10% p.a.What would be the increase/decrease in NPV of the investment if sales were 8% higher and operating expenses were 11% higher?

Question

Quizplus · Accepted Answer

The increase in sales and operating expenses changes the cash flows, affecting the NPV. Higher sales increase the NPV, while higher expenses decrease it. The net effect is a positive increase in NPV, as the additional revenue from increased sales outweighs the additional costs from increased expenses.

XHZ Accounting Firm Estimates That New Bookkeeping Software Will Increase