PLEASE SHOW FORMULAS !!!!

PROBLEM 2-8 Given Initial Investment in software Technician training cost Hourly Rate Tax Rate Discount Rate Additional Investment per year for software upgrades % Reduction in hours of technician time for installation Total hours of installation per year (55,000) (10,000) 25.00 30% 9% 15.000 25% 6,000 Solution Year 0 2 5 Year Rev Upgrade Expense EBIT Less: Taxes NOPAT Plus: DEP Less: CAPEX Project Free Cash Flows (PFCF) NPV IRR Payback Period 2-8 Introductory Project Valuation South Tel Communications is considering the pur- chase of a new software management sys- tem. The system is called B-Image, and it is expected to reduce drastically the amount of time that company technicians spend in- stalling new software. South Tel's technicians currently spend 6,000 hours per year on in- stallations, which costs South Tel $25 per hour. The owners of the B-Image system claim that their software can reduce time on task by at least 25%. The system requires an initial investment of $55,000 and an addition- al investment of $10,000 for technician train- ing on the new system. Annual upgrades will cost the firm $15,000 per year. The tax treat- ment of software purchases sometimes calls for amortization of the initial cost over time; sometimes the cost can be expensed in the year of the purchase. Before the tax experts are consulted and for purposes of this initial analysis, South Tel has decided that it will ex- pense the cost of the software in the year of 50 ... Reader Contents Notebook Bookmarks More initial investment of $55,000 and an addition- al investment of $10,000 for technician train- ing on the new system. Annual upgrades will cost the firm $15,000 per year. The tax treat- ment of software purchases sometimes calls for amortization of the initial cost over time; sometimes the cost can be expensed in the year of the purchase. Before the tax experts are consulted and for purposes of this initial analysis, South Tel has decided that it will ex- pense the cost of the software in the year of the expenditure. South Tel faces a 30% tax rate and uses a 9% cost of capital to evalu- ate projects of this type. a. Assume that South Tel has sufficient taxable income from other projects so that it can expense the cost of the software immediately. What are the free cash flows for the project for years zero through five? b. Calculate the NPV and IRR for the project