Serendipity is an Internet service provider that has a major investment in computer and telecom equipment, which needs replacement on a regular basis. The company has recently evaluated a $5 million equipment-replacement program, which has an expected life of five years. The proposal is supported by the following data:

As the ROI and NPV look healthy, the investment proposal will be submitted to the board for approval. Prior to the above figures being submitted, what comments would you make?

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In $thousands Year 0 1 2 3 4 5 Capital investment Depreciation 20% per year Asset value end of year Profit Additional income $5,000 4,000 $1,000 $1,000 $1,000 $1,000. $1,000 3,000 2,000 1,000 0 1,500 Additional expenses Depreciation Profit Tax @ 35% (150) (1,000) 2,000 2,500 2,500 2,500 (350) (500) 2500 (500) (1,000) (1,000) (1,000) (1,000) 350 650 1,000 1,000 1,000 (105) (195) (300) (300) (300) Profit after tax 245 455 700 700 700 ROI 6.1% 15.2% 35.0% 70.0% n/a Cash flow Capital investment (5,000) Cash receipts 1,500 2,000 2,500 2,500 2,500 Additional expenses (150) (350) (500) (500) (500) Tax @ 35% (105) (195) (300) (300) (300) Net cash flow $(5,000) $1,350 $1,545 $1,805 $1,700 $1,700 $(300) Discount rate 8% Net present value $1,225