Ted's Bookkeeping Service prepares tax returns for individuals and small businesses. The firm employs four professional people in the tax practice. Currently, all tax returns are prepared on a manual basis. The firm's owner, Ted Moore, is considering purchasing a computer system that would allow the firm to service all its existing clients with only three employees. To evaluate the feasibility of the computerized system, Ted has gathered the following information:
$$
\begin{array}{lr}
\text { Initial cost of the hardware and software } & \$ 32,000 \\
\text { Expected salvage value in } 4 \text { years } & \$ 0 \\
\text { Annual depreciation } & \$ 8,000 \\
\text { Annual operating costs } & \$ 4,500 \\
\text { Annual labor savings } & \$ 25,000 \\
\text { Expected life of the computer system } & 4 \text { years }
\end{array}
$$
Ted has determined that he will invest in the computer system if its pretax payback period is less than 3.5 years and its pretax IRR exceeds 12 percent.
a. Compute the payback period for this investment. Does the payback meet Ted's criterion? Explain.
b. Compute the IRR for this project to the nearest percent. Based on the computed IRR, is this project acceptable to Ted?