Question

In: Finance

1. a) Walker & Campsey wants to invest in a new computer system, and management has...

1. a) 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?

1. b) Using the information from problem 8 on Walker & Campsey, what is the equivalent annual annuity (EAA) for System B? Enter your answer rounded to two decimal places.

2) A project's base case or most likely NPV is $44,000, and assume its probability of occurrence is 50%. Assume the best case scenario NPV is 55% higher than the base case and assume the worst scenario NPV is 35% lower than the base case. Both the best case scenario and the worst case scenario have a 25% probability of occurrence. Find the project's coefficient of variation.

3)Anderson Associates is considering two mutually exclusive projects that have the following cash flows:

Year Project A Cash Flow Project B Cash Flow
0 -$11,000 -$9,000
1 3,500

6,000

2 3,000 4,000
3 5,000 3,000
4 9,000 2,000

At what cost of capital do the two projects have the same net present value?

Solutions

Expert Solution

Use spreadsheet for the ease in computations. Enter values and formulas in the spreadsheet as shown in the image below.

The obtained result is provided below.


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