Syllabus $$

If you were valuing an initial public offering in the paper products area, what beta would

Exercise $11.$ South Tel $[15]$

South Tel communications is considering the purchase of a new software management system.

The system is called B$-$image and it is expected to reduce drastically the amount of time that

company technicians spend installing new software. South Tel's technicians currently spend

$6,000$ hours per year on installations, which costs South Tel $$25$ per hour. The owners of the

B$-$image system claim that their software can reduce time on task by a least $25\%.$ The system

requires an initial investment of $$55,000$ and an additional investment of $$10,000$ for technician

training on the new system. Annual upgrades will cost the firm $$15,000$ per year. The tax

treatment 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 faces a $30\%$ tax rate and uses a

$9\%$ cost of capital to evaluate projects of this type.

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 and one?