Question

A company wants to buy a new management information system. The cost of the system is $10 million, with an additional $1,000,000 for delivery/installation. Immediate net working capital of $500,000 and an additional net working capital investment of $250,000 at the end of year one. The system has a life of 10 years. It will be depreciated as a 7-year asset under MACRS rules. Salvage value is $1,000,000 at end of 10 years. Tax rate is 24 percent. Rate of return is 16%.

New system will save $2,400,000 per year. Costs are $500,000 during the first year, and will increase by 6% per year for the ten year period. Sales price is $15 per unit of computer time and sales are expected to be 170,000 units. After the first year, demand for computer time will decline by 5% per year. An additional $400,000 per year in computer operating costs will be charged and will increase by 6% annully over the ten years.

Calculate the NPV.

Answer 1

	0	1	2	3	4	5	6	7	8	9	10
MACRS (%)		14.29%	24.49%	17.49%	12.49%	8.93%	8.92%	8.93%	4.46%
Unit Sales		170,000	161500	153425	145753.75	138466.1	131542.8	124965.6	118717.3	112781.5	107142.4
Investment	-11,000,000
NWC	-500,000	-250,000									750,000
Salvage											1,000,000
Savings		2,400,000	2,400,000	2,400,000	2,400,000	2,400,000	2,400,000	2,400,000	2,400,000	2,400,000	2,400,000
Costs		-500,000	-530,000	-561,800	-595,508	-631,238	-669,113	-709,260	-751,815	-796,924	-844,739
Sales		2,550,000	2,422,500	2,301,375	2,186,306	2,076,991	1,973,141	1,874,484	1,780,760	1,691,722	1,607,136
Operating Costs		-400,000	-424,000	-449,440	-476,406	-504,991	-535,290	-567,408	-601,452	-637,539	-675,792
Depreciation		-1,571,900	-2,693,900	-1,923,900	-1,373,900	-982,300	-981,200	-982,300	-490,600	0	0
EBT		2,478,100	1,174,600	1,766,235	2,140,492	2,358,462	2,187,538	2,015,517	2,336,893	2,657,259	2,486,605
Tax (24%)		-594,744	-281,904	-423,896	-513,718	-566,031	-525,009	-483,724	-560,854	-637,742	-596,785
Net Income		1,883,356	892,696	1,342,339	1,626,774	1,792,431	1,662,529	1,531,793	1,776,039	2,019,517	1,889,820
Cash Flows	-11,500,000	3,205,256	3,586,596	3,266,239	3,000,674	2,774,731	2,643,729	2,514,093	2,266,639	2,019,517	3,399,820
NPV	$2,967,210.85