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AC203: Week 6 Capital Budgeting Page 1 Project Part 4: Computing Solutions hires temporary workers to develop some of their software products. Recently a supercomputer has been launched in the market that enables the programmers to write the programming codes faster. To analyze whether to invest in purchase of the supercomputer, the software development manager had considered the following points: a. Currently, the company is paying an average of $40,000 per year to temporary workers to develop the software. b. The supercomputer would cost $94,500 and would have an estimated useful life of 12 years. c. The company uses straight-line depreciation on all the assets and considers the salvage value in depreciation deductions. d. The estimated salvage value of the supercomputer is $4,500. e. Annual out-of-pocket costs associated with the supercomputer would be: cost of a new computer technician, $14,000; electricity, $1,800; insurance, $200; and a maintenance contract, $3,000.

Determine the annual savings in cash operating costs that would be realized if the supercomputer were purchased.
Compute the simple rate of return expected from the supercomputer. Would the supercomputer be purchased if the Computing Solutions required rate of return is 16%?
Compute the payback period on the supercomputer. Computing Solutions will not purchase the supercomputer unless it has a payback period of five years or less. Would the supercomputer be purchased in this case?
Compute (to the nearest whole percent) the internal rate of return promised by the supercomputer. Based on this computation, does it appear that the simple rate of return is an accurate guide in investment decisions?
Note: Ignore income taxes in all calculations.

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