Question
Your clients husband is investigating the possibility of installing a new advanced computing system to improve the customer services in his company. You have been
Your clients husband is investigating the possibility of installing a new advanced computing system to improve the customer services in his company. You have been given the following information for evaluation:
The companys tax rate is 30% and it employs a straight line depreciation method. The computing system will not have any value at the end of the projects life. The company also has a required rate of return equal to 11% per annum.
a) Determine the Free Cash Flows (FCFs), for each year, to the firm for both projects.
b) Based on your calculated FCFs, calculate the Net Present Value of the project and identify which of the projects you would recommend.
c) Why cant the NPVs of unequal-life, mutually exclusive projects be compared? Which method should we use instead?
\begin{tabular}{lll} & Project A & Project B \\ \hline CAPEX / Initial Outlay & $400,000 & $200,000 \\ Project life & 8 years & 5 years \\ Operating Expense & $75,000 & $100,000 \\ Revenue (per year) & $300,000 & $400,000 \\ Variable costs & $100,000 & $200,000 \\ Investment in Net Working Capital (Year 0) & $50,000 & $100,000 \\ \hline \end{tabular}Step by Step Solution
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