Question
Option #1 Moving to the Cloud Carrington would move their servers to a Cloud based system. The savings would be immediate as they can sell
Option #1 Moving to the Cloud
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 Year 1. Under this plan, Carrington would save $260,000 a year on expenses related to maintaining their own servers, and they would pay their Cloud vendor $100,000 per year 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 years. There is no salvage value for the new equipment, but Carrington will be able to recycle the equipment for free.
Option #2 Big Data Investment
Carrington would invest in software and some hardware upgrades that will allow them to better analyze the traffic coming in to their website. Total acquisition costs for this option are estimated to be $400,000. This improved analytics capability is expected to lead to increased revenue of: $80,000 in Year 1, $120,000 in Year 2, $250,000 in Year 3, $350,000 in Year 4, and $500,000 in Year 5. The estimated cost of this obtaining this revenue will be 20% per revenue dollar related to sales staff that will analyze this data and use it to generate new client relationships. Carrington will also incur fixed costs of $10,000 per year related to software updates and hardware maintenance. Carrington will set aside $250,000 in working capital for this project and this capital will be recovered at the end of 5 years. The salvage value of the new equipment will be $9,000 at the end of 5 years.
Additional Information:
- Each option has a five year useful life.
- Carrington uses a 10% required rate of return to evaluate all of their projects.
- Acquisition costs for both projects qualify for modified accelerated depreciation (MACRS) of 50, 30, and 20% in the first three years of the project.
- Carrington is a profitable company and any income or cost savings would be taxed at Carrington's tax rate of 21%.
- All dollar values referenced in this case are in nominal dollars. For your analysis, ignore the effect of inflation.
1.Given the data provided, calculate the Payback Period, Internal Rate of Return, and NPV for your designated option.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started