Following the arrival of corona virus your firm needs to invest in updating its

software and website. The new investments, expenses and payoffs, along

with other financials, can be seen in the table below. For your calculations

assume that the WACC is 15%, and the tax rate is 25%. All of the values

in the table are measured in pounds Sterling.

Year 2020 2021 2022 2023 2024

Software upgrades 50,000 55,000 60,500 66,550 73,205

Rent existing office 570,000 598,500 628,425 659,846 692,839

Extra IT salaries 60,000 66,000 72,600 79,860 87,846

Office maintenance 15,000 15,000 15,000 15,000 15,000

CEO salary 50,000 52,500 55,125 57,881 60,775

Increased revenues 155,000 170,500 187,550 206,305 226,936

a. Calculate the incremental FCF for the upgrade.

(5 marks)

b. You forgot to consider depreciation for the new software, which according

to HMRC must be calculated linearly with a useful life of 2

years and no salvage value, assuming that investments are made at

the end of the year. Calculate the new incremental FCF.

(5 marks)

c. Calculate the NPV.

(5 marks)

d. Following encouraging news from your clients you believe that by

making an extra investment of 50,000 in 2020 you can carry on

forever beyond 2024, assuming that all the incremental free cash

flow remains as in 2024. What is the new NPV?

(5 marks)

e. From your solution to the exercise, what could be a way in which the

government encourages firms' to invest following the recent crisis?

Give three (3) possibilities. [Write no more than 5 lines.]