The management of a company is evaluating the possibility of replacing their large mainframe computer with a modern network system that requires much less office space. The network would cost $500,000 (including installation costs) and would generate $125,000 per year in after-tax operating cash flow (including the depreciation change) over the next five years due to efficiency gains. The new network will not have any salvage value at the end of the 5th year and this project does not require any working capital changes. The mainframe has a remaining book value of $50,000 and would be immediately donated to a charity for the tax benefit. The WACC is 10% and its tax rate is 40%.

14-What is the cash flow at time 0?

a) ($500,000)

b) ($450,000)

c) ($480,000)

d) ($550,000)

e) ($476,000)

f) None of the above

15-What is the NPV?

a) $23,848.23

b) ($6,151.65)

c) ($26,151.65)

d) ($2,151.65)

e) $10,354.36

f) None of the above

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