Part 1 (25 marks) Capital Budgeting As a senior analyst for Lawton Enterprise, you have been asked to evaluate a new computer hardware project with the following characteristics Acquiring a computer hardware for a cost of $2,000,000 The computer hardware has an expected five year life The initial investment in net working capital (in Year 0) is $200,000 The investment in working capital is to be completely recovered by the end of the projects life (in Year 5) The computer hardware can be depreciated on a straight line (prime cost) basis and there is no expected salvage value after the five years The produced software is expected to generate sales of $1,250,000 in Year 1 They grow at a 25 annual rate for the next two years, and then grow at a 10 annual rate for the last two years Fixed operating expenses are $100,000 for Years 1 3 and $110,000 for Years 4 5 Variable operating expenses are 20 of sales in Years 1 2 and 25 of sales in Years 3 5 Lawton does not have any available space where the project can be located for five years and you anticipate to rent the required office space it would cost $65,000 per year for the life of the project You expect that the project will need to hire three new software specialists at $50,000 (each specialist) per year (start in Year 1) for the full five years to work on the software The project will use a van currently owned by Lawton Although the van is not currently being used by Lawton, it can be rented out for $15,000 per year for five years The book value of the van is $20,000 The van is being depreciated straight line (with five years remaining for depreciation) and is expected to be worthless after the five years Lawtons marginal tax rate is 30 , and the discount rate is 12 Based on the information presented above, answer the following questions (12 marks) Calculate the incremental free cash flow during the projects life (starting from Year 0 to Year 5) Show workings as a Table (13 marks) Calculate the NPV, payback period and IRR of the project Should the project be accepted Show workings and explain your answer(s) ax rate is 30 , and the discount rate is 12

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Part 1 (25 marks) Capital Budgeting As a senior analyst for Lawton Enterprise, you have been asked to evaluate a new computer hardware project with

Part 1 (25 marks) Capital Budgeting

As a senior analyst for Lawton Enterprise, you have been asked to evaluate a new computer hardware project with the following characteristics:

Acquiring a computer hardware for a cost of $2,000,000.
The computer hardware has an expected five-year life.
The initial investment in net working capital (in Year 0) is $200,000. The investment in working capital is to be completely recovered by the end of the projects life (in Year 5).
The computer hardware can be depreciated on a straight-line (prime cost) basis and there is no expected salvage value after the five years.
The produced software is expected to generate sales of $1,250,000 in Year 1. They grow at a 25% annual rate for the next two years, and then grow at a 10% annual rate for the last two years.
Fixed operating expenses are $100,000 for Years 1-3 and $110,000 for Years 4-5.
Variable operating expenses are 20% of sales in Years 1-2 and 25% of sales in Years 3-5.
Lawton does not have any available space where the project can be located for five years and you anticipate to rent the required office space it would cost $65,000 per year for the life of the project. You expect that the project will need to hire three new software specialists at $50,000 (each specialist) per year (start in Year 1) for the full five years to work on the software.
The project will use a van currently owned by Lawton. Although the van is not currently being used by Lawton, it can be rented out for $15,000 per year for five years. The book value of the van is $20,000. The van is being depreciated straight-line (with five years remaining for depreciation) and is expected to be worthless after the five years.
Lawtons marginal tax rate is 30%, and the discount rate is 12%.

Based on the information presented above, answer the following questions.

(12 marks)

Calculate the incremental free cash flow during the projects life (starting from Year 0 to Year 5). Show workings as a Table.

(13 marks)

Calculate the NPV, payback period and IRR of the project. Should the project be accepted? Show workings and explain your answer(s).ax rate is 30%, and the discount rate is 12%.