Wren Designs is considering the purchase of a new computer-aided drafting station to assist in the preparation of architectural plans. The company’s current system is ten years old and has begun to...

Wren Designs is considering the purchase of a new computer-aided drafting station to assist in the preparation of architectural plans. The company’s current system is ten years old and has begun to crash at least once a day. The new system has a purchase price of $20,132 and will save the company $4,000 per year in operating expenses. The system is expected to last seven years. Wren estimates its cost of capital to be 8%.

Required

a. What is the net present value of the new computer-aided drafting station? Based on net present value, should Wren purchase the new system? Why or why not?

b. What is the new system’s internal rate of return? Based on the internal rate of return, should Wren purchase the new system? Why or why not?

c. What is the system’s profitability index?