Problem #3 (20 points)show your computation

A company must make a mutually exclusive choice between two different IT investment alternatives (i.e., A or B). Assume a discount rate of 15 percent. The initial cost and cash flow from the two projects are given in the table below:

a.What are the NPVs for Alternatives A and B?

b.Which alternative should be selected based on NPV?

c.What are the PIs for Alternatives A and B?

d.Which alternative should be selected based on PI alone?

Alternative A

Alternative B

Initial cost

$60,000

$45,000

Cash flow Year 1

$10,000

$70,000

Cash flow Year 2

$40,000

$20,000

Cash flow Year 3

$90,000

$5,000

Problem #4 (20 points)show your computation.

A cutting-edge IT company is facing a classic decision as to which of three mutually exclusive choices they should select in the development of the next generation of programming software programs. They have three choices: to allow their internal IT staff to do the program, use some internal staff and some outsourced staff, or to completely outsource the program they are planning. If they have a discount rate of 10 percent and the initial cost and cash flows given in the table below, which should they choose? Use whatever analysis you want to defend your IT investment decision.

Internal IT program

Mixed internal & outsource program

Outsource program

Initial cost

$130,000

$150,000

$220,000

Cash flow Year 1

$10,000

$30,000

$70,000

Cash flow Year 2

$50,000

$60,000

$70,000

Cash flow Year 3

$60,000

$70,000

$70,000

Cash flow Year 4

$60,000

$50,000

$70,000

Problem # 5 (20 points)

XYZ Company manufactures electronic components.The company has developed a device that management believes could be modified and marketed as an electronic game.

The following information for the new product was developed from the best estimates of the marketing and production managers.

Annual sales volume1,000,000 units

Selling price$10 per unit

Cash variable costs $4 per unit

Cash fixed costs$2,000,000 per year

Investment required$12,000,000

Project life5 years

At the end of the five-year useful life, there will be a $0 disposal value.XYZs required rate of return on this project is 14%.

The electronic game industry is a new market for XYZ, and management is concerned about the reliability of the estimates.The controller has proposed applying sensitivity analysis to selected factors.

Required:

1. What is the net present value of this investment proposal? (show your computation)
2. What is the effect on the net present value of the following two changes in assumptions?(Treat each item independently of the other, and show your computation).
3. 10% reduction in the selling price
4. 10% increase in the variable cost per unit
5. Discuss how management would use the data developed in requirements 1 and 2 in its consideration of the proposed capital investment.