Question
Q1.Alpha & Omega wants to invest in a new computer system, and management has narrowed the choice to Systems A and B. System A requires
Q1.Alpha & Omega wants to invest in a new computer system, and management has narrowed the choice to Systems A and B.
System A requires an up-front cost of $100,000, after which it generates positive after-tax cash flows of $70,000 at the end of each of the next 2 years.The system could be replaced every 2 years, and the cash inflows and outflows would remain the same.
System B also requires an up-front cost of $100,000, after which it would generate positive after-tax cash flows of $48,000 at the end of each of the next 3 years.System B can be replaced every 3 years, but each time the system is replaced, both the cash outflows and cash inflows would increase by 10%.
The company needs a computer system for 6 years, after which the current owners plan to retire and liquidate the firm.The company's cost of capital is 14%.
A.What is the NPV (on a 6-year extended basis) of System A?
B.what is the NPV (on a 6-year extended basis) of System B?
C.what is the equivalent annual annuity (EAA) for System B?
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