Question

In: Finance

Alpha & Omega wants to invest in a new computer system, and management has narrowed the...

Alpha & Omega 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 $100,000, after which it generates positive after-tax cash flows of $70,000 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 $100,000, after which it would generate positive after-tax cash flows of $48,000 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 10%.

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 14%. What is the NPV (on a 6-year extended basis) of 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.

Solutions

Expert Solution

Calculation of NPV of System A
Year 0 1 2 3 4 5 6
Up front cost - 100,000.00 - 100,000.00 - 100,000.00
After tax cash flows    70,000.00       70,000.00    70,000.00       70,000.00    70,000.00    70,000.00
Net Cash flows - 100,000.00    70,000.00 -    30,000.00    70,000.00 -    30,000.00    70,000.00    70,000.00
x Discount Factor @ 14% 1 0.877193 0.769467528 0.6749715 0.592080277 0.5193687 0.4555865
Present Values - 100,000.00    61,403.51 -    23,084.03    47,248.01 -    17,762.41    36,355.81    31,891.06
Net Present Value (NPV)                                                                                                                                                                  36,051.95
The NPV (on a 6-year extended basis) of System A       36,051.95

Related Solutions

Alpha & Omega wants to invest in a new computer system, and management has narrowed the...
Alpha & Omega 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 $100,000, after which it generates positive after-tax cash flows of $70,000 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 $100,000, after which it...
Alpha & Omega wants to invest in a new computer system, and management has narrowed the...
Alpha & Omega 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 $100,000, after which it generates positive after-tax cash flows of $70,000 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 $100,000, after which it...
Q1. Alpha & Omega wants to invest in a new computer system, and management has narrowed...
Q1. Alpha & Omega 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 $100,000, after which it generates positive after-tax cash flows of $70,000 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 $100,000, after which...
Walker & Campsey wants to invest in a new computer system, and management has narrowed the...
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...
Walker & Campsey wants to invest in a new computer system, and management has narrowed the...
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...
Walker & Campsey wants to invest in a new computer system, and management has narrowed the...
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...
Walker & Campsey wants to invest in a new computer system, and management has narrowed the...
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...
Q1.Walker & Campsey wants to invest in a new computer system, and management has narrowed the...
Q1.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...
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...
Alpha and Omega are U.S. corporations. Alpha has a plant inHamburg that imports components from...
Alpha and Omega are U.S. corporations. Alpha has a plant in Hamburg that imports components from the United States, assembles them, and then sells the finished product in Germany. Omega is at the opposite extreme. It also has a plant in Hamburg, but it buys its raw material in Germany and exports its output back to the United States. How is each firm likely to be affected by a fall in the value of the euro? How could each firm...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT