Software Hub is deciding whether to purchase new accounting software. The cost of the software package is $55,000, and its expected life is 10 years. The payback for this investment is four years. Assuming equal yearly cash flows, what are the expected annual net cash savings from the new software? (Assume the investment has zero salvage value.)

Question

Quizplus · Accepted Answer

To calculate the expected annual net cash savings, we need to first calculate the total cash savings for the 10-year life of the software.

Total cash savings = Cost of old software - Cost of new software 
= 10 years x Annual cost of old software - Cost of new software 
= 10 years x Annual cost of old software - $55,000

As payback period is four years, the total annual cash savings would be:

Total annual cash savings = Total cash savings / 6 years

= ($55,000 - 0)/6 years

= $9,167 per year

Since the question asks for equal yearly cash flows, we divide the total annual cash savings by 2 to get the expected annual net cash savings:

Expected annual net cash savings = Total annual cash savings / 2

= $9,167 / 2

= $4,584

Therefore, the expected annual net cash savings from the new software is $4,584 or approx. $13,750 over the 3 year period requested. So option C is the correct answer.

Software Hub Is Deciding Whether to Purchase New Accounting Software