Question

In: Finance

You have been tasked with fielding an interactive video communications systems. Your job is to provide...

You have been tasked with fielding an interactive video communications systems. Your job is to provide the U.S. Army with the least expensive system (for the next 5 years) from the following alternatives:

1. Intertactical. An interactive communications system designed to rely on current satellite systems. The Army must spend $10,590,843.42 now. (t = 0) and $1.7 million this year. (t = 1), increasing that investment by 13% in subsequent years for 4 additional years. (t = 2 through 5).

2. TacLine. Provides interactive communications that operate through existing phone lines. The Army must spend $4 million now (t = 0) and $3 million dollars this year (t = 1), increasing its investment by $500,000 each year thereafter for 4 additional years (t = 2 through 5).

(a) Draw and label a cash flow diagram for each of these ventures.

(b) Prepare a cash flow (CF) table in Excel for each of these ventures.

(c) Using an annual interest rate of 8%, conduct a present worth analysis for the first venture (Intertactical).

(d) Using an annual interest rate of 8%, conduct a present worth analysis for the second venture (TacLine).

(e) Are these two ventures equivalent? Why or why not?

Expert Solution

Part (a)

Cash flow diagram for each of the two ventures:

For Intertactical, cash flow in year 2 = C₂ = C₁x (1 + 13%) = 1,700,000 x (1 + 13%); C₃ = C₂ x (1 + 13%) and so on

For Tacline, C₂ = C₁+ 500,000 = 3,000,000 + 500,000 = 3,500,000 and C₃ = C₂ + 500,000 and so on

Part (b), (c), (d)

Please see the table below. All financials are in $. The cells highlighted in yellow contain the PW values. Adjacent cells in blue contain the formula in excel I have used to get the final output.

Part (e)

No, the two ventures are not equivalent because

Their PWs are different
Cash flows are different
Cash flow patterns are different, Tactical has higher cost upfront at t = 0

jeff jeffy answered 9 months ago

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