Question
You are the finance manager for a premiere athletic venue in the United States. In an effort to streamline the point of the purchase process
You are the finance manager for a premiere athletic venue in the United States. In an effort to streamline the point of the purchase process and track customer data more effectively, you are considering the purchase of a new software program. The software program will cost $25,000. You project that this system will increase your after-tax revenue over time in the following way: $3,500 in Year 1; $4,200 in Year 2; $6,500 in Year 3; $8,400 in Year 4; $9,500 in Year 5; $11,300 in Year 6; and $12,700 in Year 7. You project the cost of capital to be 8%. Given this information, please answer the following questions. Be sure to show all of your work.
a. Using the payback period model, when will you recover your initial investment? If your companys criterion for capital budgeting is the full recovery of the investment in four years or less, should you purchase the software program?
b. Using the discounted payback model, when will you recover your initial investment? If your companys criterion for capital budgeting is the full recovery of the investment in four years or less, should you purchase the software program?
c. Using the net present value (NPV) model, should your company purchase the software program? If so, explain why. The only criterion for your company in this instance is that the NPV be positive.
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