2)

LAM corporation is considering buying some software from IBM to help with the online sales from its website. The software package costs $850,000 and will be fully expensed in the year that it is purchased. It is predicted that the purchase of this software will directly result in an increase in sales of $500,000 during the first year it is used, and the increased sales will grow at a rate of 4% per year during years two, three, four, and five. It is expected that this software will be obsolete and need to be upgraded after five years. Cost of goods sold and operating expenses for LAM are 25% of sales each year. The additional business resulting from the software means that LAM needs an increase in net working capital of $25,000 immediately. This additional net working capital will be recovered in full at the end of the fifth year. The corporate tax rate for LAM is 21% and the required rate of return on it is 18%. What is the NPV and the IRR for the purchase of the new software?

The treasurer of Amaro Canned Fruits, Inc. has projected the cash flows of projects A, B, and C as follows. The relevant discount rate is 12 percent. These projects are mutually exclusive Year 0 Project A -$90,000 70,000 70,000 Project B -$190,000 130,000 130,000 Project C -$90,000 75,000 60,000 Compute the NPV and IRR for each of the three projects and determine which you will do