What do we know? Please Calculate NPV and IRR for WACC of 9.65% on Geo Tech. Show all work in excel.

Three service levels- all contracts for the one level

Initial Fees of CAD18000 for all projects

The licensing fee is CAD9000

The initial payment is CAD210000

Set up price is CAD14000 for each contract

Contracts with annual licensing fees are up to year 5 with a 5-year project/investment length

Operating costs CAD240000 per year 55 rolling contracts or less and CAD360000 per year if more than 55 rolling contracts

Fluctuation in the number of contracts ranges from 80% to exceeding 50% of expected contracts

Contracts per year

year 1 20

year 2 30

year 3 20

year 4 10

year 5 10

0.86 exchange rate

And the additional exchange rate

Year 0: 1 CAD = 0.86 USD

Year 1: 1 CAD = 0.825 USD

Year 2: 1 CAD = 0.805 USD

Year 3: 1 CAD = 0.790 USD

Year 4: 1 CAD = 0.780 USD

Year 5: 1 CAD = 0.775 USD

Depreciation (straight) is CAD840000 over three years with no salvage value but (could be?) sold for CAD100000 at year 5

The tax rate is 35%

Expenses incurred for set up fee at the beginning, first licensing fee at month 2, subsequent annual license

Cash flows begin in year one, not with an initial investment

Discount rate 9.65% at Geo Tech's WACC

Calculate the NPV (and most likely IRR) using the discounted cash flows and the discount rate of 9.65%.

CAD depreciated 12% in the previous three years

USD inflation 1.50%

CAD inflation 1.75%

Detailed Information:

Presume this investment is made in Year 0.

Geo Tech will be making an investment decision based on NPV in USD terms.

The project cost at Year 0 is estimated at 840,000 CAD. You should determine the USD equivalent.

When you determine the annual project cash flows, the last step is to convert the net cash flows into USD.

Use the initial assumptions as given, including a five-year horizon, no inflation, with exchange rates constant at the beginning level of 0.86 USD/CAD over the life of the project. Y

You may then examine and compare alternative scenarios by incorporating changes into your analysis as you deem appropriate.

Case Narrative Clients signed three-to-six-year contracts. The contracts stipulated annual licensing fees, which provided remote access to models of their site and toolkits stored on Geo Techmanaged servers. The constant upgrading,maintenance, and ongoingdevelopmentofplug-ins, combinedwiththe need tocustomize hardware to optimize software routines, made it impossible to host site models on client systems. The fee structure was relatively simple: Geo Tech charged an initial setup fee of USD18,000 and annual licensing fees of USD3,000, USD8,000, and USD14,000 for Tracker, Foresight, and Oasis, respectively. The investment would last five years. All contracts would be at the Foresight level, for three years, and would be priced in Canadian dollars. Given Geo Techs U.S. prices, the exchange rate at the time of USD 0.860 per CAD and rounding to the nearest thousand, the fees would be priced at CAD21,000, and the annual licensing fee would be priced at CAD9,000. These contract prices were not expected to change over the coming five years. The company would generate 20, 30, and 20 new contracts over the first three years, respectively, and 10 contracts in each of the last two years. The decline in contracts written for the Canadian facility reflected the expectation that in a few years customers would become less concerned about data location and would be willing to sign on for services at the U.S. facility. Geo Tech would initially have to invest CAD840,000 in equipment, which would be depreciated straight-line over three years with no assumed salvage value but could be sold for CAD100,000 at the end of five years. The operation would have the following cost structure. Every setup of a contract would cost CAD14,000. Other cash operating costs would be CAD240,000 a year if there were less than 55 ongoing contracts and CAD360,000 otherwise. The tax rate on all earnings would be 35%. Do not include annual licensing fees beyond the fifth year of the project. The setup fee was paid at the contract signing, the first licensing fee once the client model was running (about two months after the contract signing), and the subsequent annual licensing fees on the anniversary of the first licensing fee payment. There was no reason to make the model overly complicated and were comfortable with annual cash flow estimates with the setup and first annual payment occurring in the same year, and all cash flows other than the investment beginning in one year. The Geo Tech discount rate for project valuation was 9.65% (the weighted average cost of capital for the company). Operating costs, on the other hand, were increasing with inflation. The squeeze on margins had been more than offset by volume growth, and the firms profitability waslargely determined by Geo Techs ability to leverage its fixed operating costs and past research investments. Inflation in the United States was quite low and expected to average about 1.50% over the next five years. Inflation in Canada was expected to be slightly higher at 1.75%.

Calculate NPV and IRR in Excel using 9.65% WACC to determine if project is profitable.