2) A large brokerage company is assessing the introduction of a new computer system to improve routing and execution of customer orders. The managing director wants to install a new Smart Routing system, whereas another director prefers the Direct Routing system. Each machine provides the same order-execution ability and can satisfy the broker's obligation to give investors the best possible order execution. The initial cost of each system is $180,000, but because of differing software, maintenance, and processing requirements, estimates of the after-tax costs of operation differ. These are as follows: Period 1 2 3 4 5 6 7 Smart Routing Direct Routing 52,000 50,000 52,000 50,000 49,000 53,000 49,000 53,000 49,000 53,000 45,000 45,000 The company has an after-tax weighted cost of capital of 10.45 per cent. A) Can you determine the IRR for each project? Explain. B) Determine the NPV for each project. Which project does NPV suggest you recommend? C) Is NPV the correct tool with which to make your recommendations? Explain. D) Using an appropriate method, determine which system you would recommend to the board. Identify the calculations that support your decision.

Essentials of Business Analytics (MindTap Course List)
2nd Edition
ISBN:9781305627734
Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Chapter15: Decision Analysis
Section: Chapter Questions
Problem 5P: Hudson Corporation is considering three options for managing its data warehouse: continuing with its...
Question
2) A large brokerage company is assessing the introduction of a new computer system to improve
routing and execution of customer orders. The managing director wants to install a new Smart
Routing system, whereas another director prefers the Direct Routing system. Each machine
provides the same order-execution ability and can satisfy the broker's obligation to give investors
the best possible order execution. The initial cost of each system is $180,000, but because of
differing software, maintenance, and processing requirements, estimates of the after-tax costs
of operation differ. These are as follows:
Period
1
2
3
4
5
6
7
Smart Routing
Direct Routing
52,000
50,000
52,000
50,000
49,000
53,000
49,000
53,000
49,000
53,000
45,000
45,000
The company has an after-tax weighted cost of capital of 10.45 per cent.
A) Can you determine the IRR for each project? Explain.
B) Determine the NPV for each project. Which project does NPV suggest you recommend?
C) Is NPV the correct tool with which to make your recommendations? Explain.
D) Using an appropriate method, determine which system you would recommend to the
board. Identify the calculations that support your decision.
Transcribed Image Text:2) A large brokerage company is assessing the introduction of a new computer system to improve routing and execution of customer orders. The managing director wants to install a new Smart Routing system, whereas another director prefers the Direct Routing system. Each machine provides the same order-execution ability and can satisfy the broker's obligation to give investors the best possible order execution. The initial cost of each system is $180,000, but because of differing software, maintenance, and processing requirements, estimates of the after-tax costs of operation differ. These are as follows: Period 1 2 3 4 5 6 7 Smart Routing Direct Routing 52,000 50,000 52,000 50,000 49,000 53,000 49,000 53,000 49,000 53,000 45,000 45,000 The company has an after-tax weighted cost of capital of 10.45 per cent. A) Can you determine the IRR for each project? Explain. B) Determine the NPV for each project. Which project does NPV suggest you recommend? C) Is NPV the correct tool with which to make your recommendations? Explain. D) Using an appropriate method, determine which system you would recommend to the board. Identify the calculations that support your decision.
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