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 $170,000, but because of differing software, maintenance, and processing requirements, estimates of the after-tax costs of operation differ. These are as follows: Period Smart Routing Direct Routing 1 39,000 56,000 2 48,000 61,000 3 48,000 61,000 4 48,000 61,000 5 48,000 52,000 6 48,000 7 46,000 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.
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 $170,000, but because of differing software, maintenance, and processing requirements, estimates of the after-tax costs of operation differ. These are as follows:
Period Smart Routing Direct Routing
1 39,000 56,000
2 48,000 61,000
3 48,000 61,000
4 48,000 61,000
5 48,000 52,000
6 48,000
7 46,000
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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