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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
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: Initial cost of project $1,250,000 Depreciation method Straight-line Salvage value $0 Residual value (sales price at end of project) $350,000 Tax rate (ordinary and capital gains tax) 35% Incremental annual revenues in year 1 $368,000 Incremental annual expenses in year 1 $198,500 Working capital required at time of investment (t=0) $50,000 Working capital as percentage of revenue each year 12.0% Cost of capital 12% Economic life 10 years Requirements: a. Utilize both NPV and IRR. Assume that the initial $368,000 in annual revenues will grow at a 8% annual rate and that the initial $198,500 in annual expenses will grow at a 5% annual rate. The growth starts in year 2 from year 1, i.e. the revenue is year 2 is $397,440, etc. Working capital is released at the end of the project
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