Bell Mountain Vineyards is considering updating its current manual accounting sy

Question

Bell Mountain Vineyards is considering updating its current manual accounting system with a high-end electronic system. While the new accounting system would save the company money, the cost of the system continues to decline. The Bell Mountain’s opportunity cost of capital is 10 percent, and the costs and values of investments made at different times in the future are as follows:

Calculate the NPV of each choice. (Round answers to the nearest whole dollar, e.g. 5,275.)

The NPV of each choice is:

Suggest when should Bell Mountain buy the new accounting system?

Year Cost Value of Future Savings
(at time of purchase) 0 $5,000 $7,000 1 4,500 7,000 2 4,000 7,000 3 3,600 7,000 4 3,300 7,000 5 3,100 7,000

Explanation / Answer

Calculate the NPV of each choice. (Round answers to the nearest whole dollar, e.g. 5,275.) The NPV of each choice is: NPV0 = $ 1127 NPV1 = $ 1540 NPV2 = $ 1953 NPV3 = $ 2284 NPV4 = $ 2532 NPV5 = $ 2697 Suggest when should Bell Mountain buy the new accounting system? Bell Mountain should buy the accounting system in Year 3 (Law of Averages). Bell Mountain should purchase the system in  year 3year 1year 2year 5year 4.

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