Carrington would move their servers to a cloud based system. The savings would be immediate as they can sell their old server equipment for $300,000 after applicable taxes. To move to the cloud based system, Carrington would need to modify their current equipment and pay a onetime set up fee for a total acquisition cost of $700,000. They would also need to train their employees to use the new system and the estimate for training costs is $50,000 to be spent in the yr 1. Under this plan, Carrington would save $260,000 a yr on expenses related to maintaining their own servers, and they would pay their cloud vendor $100,000 per yr in fees. Carrington will set aside $200,000 in working capital for this project and this capital will be recovered at the end of 5 yrs. There is no salvage value of the new equipment will be $9,000 at the end of 5 yrs.

This option has a 5 yr useful life, Carrington uses a 10% hurdle rate to evaluate all of their projects, Acquisition costs for project qualify for modified accelerated depreciation of 50, 30, and 20% in first three years of the project, Carrington is a profitable company and any income would be taxed at Carrington's tax rate of 30%, All dollars values referenced in this case are in nominal dollars and for analysis ignore the effect of inflation.

1. Calculate the payback period, Internal rate of Return, and NPV for your designated option.

2. Due to increased demand for cloud computing resources, Carrington's cloud computing fees are expected to rise 10% from yr 1 to yr 2, 6% from yr 2 to year 3, and level off ( stay the same) in yr 3-5. This increase in cost would not have happened if Carrington stayed with their old system of housing their own servers.

3. Expecting a difficult yr, Carrington's cloud vendor decides to waive their annual fee in yr 1, but will charge Carrington $125,000 per yr in yr 2-5.

4. A great tax plan. Congress in proposing a new corporate tax plan that reduces the federal tax rate that Carrington pays from 30% to 20%. However, this tax plan would also do away with MASCRS and replace it with straight line depreciation for tax purposes ( over five years ).

a. Using the original estimates for your designated option, estimate the effect of this tax plan on NPV.

b. Next, given the uncertainty related to the effect of the proposed tax plan on future business, uses a 14% hurdle rate instead of 10% hurdle rate used before in estimating the effect of the tax plan (i.e just redo 4A).

5. Besides the capital budgeting numbers that you have calculated above, what are some qualitative concerns related to accepting your designated option. Discuss amongst your team and list at least two. Provide a shot discussion of why each would be considered an advantage or disadvantage.