Question
1. a) Walker & Campsey wants to invest in a new computer system, and management has narrowed the choice to Systems A and B. System
1. a) Walker & Campsey wants to invest in a new computer system, and management has narrowed the choice to Systems A and B. System A requires an up-front cost of $125,000, after which it generates positive after-tax cash flows of $80,000 at the end of each of the next 2 years. The system could be replaced every 2 years, and the cash inflows and outflows would remain the same.
System B also requires an up-front cost of $125,000, after which it would generate positive after-tax cash flows of $60,000 at the end of each of the next 3 years. System B can be replaced every 3 years, but each time the system is replaced, both the cash outflows and cash inflows would increase by 5%.
The company needs a computer system for 6 years, after which the current owners plan to retire and liquidate the firm. The company's cost of capital is 12%. What is the NPV (on a 6-year extended basis) of the system that adds the most value?
1. b) Using the information from problem 8 on Walker & Campsey, what is the equivalent annual annuity (EAA) for System B? Enter your answer rounded to two decimal places.
2) A project's base case or most likely NPV is $44,000, and assume its probability of occurrence is 50%. Assume the best case scenario NPV is 55% higher than the base case and assume the worst scenario NPV is 35% lower than the base case. Both the best case scenario and the worst case scenario have a 25% probability of occurrence. Find the project's coefficient of variation.
3)Anderson Associates is considering two mutually exclusive projects that have the following cash flows:
Year | Project A Cash Flow | Project B Cash Flow |
0 | -$11,000 | -$9,000 |
1 | 3,500 | 6,000 |
2 | 3,000 | 4,000 |
3 | 5,000 | 3,000 |
4 | 9,000 | 2,000 |
At what cost of capital do the two projects have the same net present value?
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