In: Finance
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.
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 |