Question

Walker & Campsey wants to invest in a new computer system, and management has narrowed the choice to Systems A and B. System A requires an up-front cost of $125,000, after which it generates positive after-tax cash flows of $80,000 at the end of each of the next 2 years. The system could be replaced every 2 years, and the cash inflows and outflows would remain the same. System B also requires an up-front cost of $125,000, after which it would generate positive after-tax cash flows of $60,000 at the end of each of the next 3 years. System B can be replaced every 3 years, but each time the system is replaced, both the cash outflows and cash inflows would increase by 5%. The company needs a computer system for 6 years, after which the current owners plan to retire and liquidate the firm. The company's cost of capital is 12%. What is the NPV (on a 6-year extended basis) of the system that adds the most value? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

Using the information from problem 8 on Walker & Campsey, what is the equivalent annual annuity (EAA) for System A? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

PLEASE i NEED THIS PART ANSWERED.

Answer 1

	Cash flow		Discounted cash flow
Year	A	B	PV factor @ 12%	A	B
0	-125000	-125000	1.00	(125,000.00)	(125,000.00)
1	80000	60000	0.89	71,428.57	53,571.43
2	-45000	60000	0.80	(35,873.72)	47,831.63
3	80000	-65000	0.71	56,942.42	(46,265.72)
4	-45000	60000	0.64	(28,598.31)	38,131.08
5	80000	60000	0.57	45,394.15	34,045.61
6	80000	60000	0.51	40,530.49	30,397.87
				24,823.59	32,711.91

A - At the end of year 2 and 4 - -125000 is added to cashflow as new system needs to be purchased at the end of each 2 years

B - At the end of year3 - -125000 is added to cashflow as new system needs to be purchased at the end of each 3 years

Year 6 the project is terminated and hence no system purchased

Discount factor = 1/(1+r)^n