Question
Alpha company is a publicly traded company, with 20 million shares trading at $ 70 a share and $ 600 million in debt (market value
Alpha company is a publicly traded company, with 20 million shares trading at $ 70 a share and $ 600 million in debt (market value as well as book value) outstanding. The firm derives 70% of its value from cloud storage and hosting, and the remaining 30% from technical service. The unlevered beta is 0.8 for firms in the cloud business and 1.2 for firms in the technical service business. Alpha company is rated A and can borrow money at 5%. The risk-free rate is 2% and the market risk premium is 8%; the corporate tax rate is 30%, and the firm has a capital gains tax rate of 20%
Alpha Company generated $ 14 million in pre-tax operating income on $ 100 million in revenues last year; the firm is stable and does not expect revenues or operating income to change over the next 10 years. Its ecommerce management is in shambles and eCommerce as a percent of revenues amounted to 10% last year. Alpha considering investing in a new eCommerce management system, which will cost $ 17 million. The eCommerce management system is expected to have a 10- year life, over which period it can be depreciated straight line down to a salvage value of zero. The new eCommerce management system benefits the company by providing management with updated sales information; it is expected to increase revenues to $ 117 million next year (and operating margins to remain unchanged). The revenues and operating income from year 2 to year 10 will remain unchanged at year 1 levels.
A. Calculate the cashflows at time 0 (today) from this investment.
B. Calculate the NPV of investing in the new eCommerce management system.
C. Calculate IRR of the new eCommerce management system.
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