Question
Verizon is considering a $2,000,000 investment in new communication infrastructure. The project will depreciate at a rate of 15% annually, leaving book values of $1,700,000,
Verizon is considering a $2,000,000 investment in new communication infrastructure. The project will depreciate at a rate of 15% annually, leaving book values of $1,700,000, $1,400,000, $1,100,000, $800,000, $500,000, and $200,000 at the end of each year. Expected annual cash flows are $400,000, $500,000, $400,000, $300,000, $200,000, and $100,000. The profits are projected at $100,000, $200,000, $100,000, $0, $-100,000, and $-200,000, resulting in ARR percentages of 5%, 10%, 5%, 0%, -5%, and -10%. The average profit is $-33,333, with an average investment of $1,000,000, yielding an average ARR of -3.33%. The cumulative cash flows indicate a payback period of 5.5 years. The NPV, discounted at 12%, is calculated to be $50,000.
Requirements:
- Determine the ARR, payback period, and NPV for the investment.
- Discuss the project's potential financial benefits and drawbacks.
- Provide a final recommendation on the investment decision.
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