You have been asked to help a local company evaluate a major capital expenditure. The company is a new internet company and must buy a large computer system which will generate additional revenue. The company provides you with the following information:

Requirement: 

Write a letter to the president of the company explaining whether the company should acquire the computer system, using NPV.

Assume that the initial $81,000,000 in annual revenues will grow at a 10% annual rate and that the initial $35,000,000 in annual expenses will grow at a 75% annual rate. The growth starts in year 2 from year 1, i.e. the revenue is year 2 is 89,100,000, etc. Working capital is released at the end of the project.

Initial cost of project Depreciation method Salvage value Residual value (sales price at end of project) Tax rate (ordinary and capital gains tax) Incremental annual revenues in year 1 Incremental annual expenses in year 1 Working capital required at time of investment (t=0) Working capital as percentage of revenue each year Cost of capital Economic life $50,000,000 sum-of-years digits $500,000 $5,000,000 35% $41,850,000 $35,750,000 $1,000,000 2.0% 10% 10 years