The consulting company Clark Robinson & Martin (CRM) is in that never-ending budgeting phase of the year. Realizing that they couldn't defer a technology update any longer, the managers plan to replace all of the computers in the office. The old computers will be sold for market value. When the new computers reach the end of their useful lives, they will be sold as well. The cost of the combined new computers and annual software updates should be more than covered by efficiency gains and increased volume of sales -at least that's what the managers are expecting. Information related to this investment is as follows. Cost of new computers Salvage value of new computers at end of useful life Life of new computers (years) Market value of old computers today (equal to book value) Annual software update cost (necessary for all computers, old or new) Annual operating cash inflows from efficiency gins and increased sales due to new computers Minimum required rate of return Applicable tax rate $25,400 $2,400 5 $1,900 $3,200 $9,600 Determine if this investment makes sound financial sense for this company by completing the following. 6% 24%

The consulting company Clark Robinson & Martin (CRM) is in that never-ending budgeting phase of the year. Realizing that they couldn't defer a technology update any longer, the managers plan to replace all of the computers in the office. The old computers will be sold for market value. When the new computers reach the end of their useful lives, they will be sold as well. The cost of the combined new computers and annual software updates should be more than covered by efficiency gains and increased volume of sales -at least that's what the managers are expecting. Information related to this investment is as follows. Cost of new computers Salvage value of new computers at end of useful life Life of new computers (years) Market value of old computers today (equal to book value) Annual software update cost (necessary for all computers, old or new) Annual operating cash inflows from efficiency gins and increased sales due to new computers Minimum required rate of return Applicable tax rate $25,400 $2,400 5 $1,900 $3,200 $9,600 Determine if this investment makes sound financial sense for this company by completing the following. 6% 24%

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...

See similar textbooks

Similar questions

The consulting company Miller Davis & Brown (M D B) is in that never-ending budgeting phase of the year. Realizing that they couldn’t defer a technology update any longer, the managers plan to replace all of the computers in the office. The old computers will be sold for market value. When the new computers reach the end of their useful lives, they will be sold as well. The cost of the combined new computers and annual software updates should be more than covered by efficiency gains and increased volume of sales—at least that’s what the managers are expecting. Information related to this investment is as follows. Cost of new computers $25,400 Salvage value of new computers at end of useful life $2,400 Life of new computers (years) 5 Market value of old computers today (equal to book value) $1,900 Annual software update cost (necessary for all computers, old or new) $2,800 Annual operating cash inflows from efficiency gains and increased sales due to new…
Capital budgeting GAP, a retail chain, is considering buying a registered software from Microsoft so that it can more effectively deal with its retail sales. The software costs $750,000 and will be depreciated down to zero using the straight-line method over its five-year economic life. The marketing department predicts the sales will be $600,000 per year for the next three years, after which the market will cease to exist. The cost of one unit sold and operating expenses are predicted to be 25% of sales. After three years the software can be sold for $400,000. The GAP also needs to add net working capital of $25,000 immediately and maintain it for the next two years. The corporate tax rate is 35%. a) Compute the unlevered net income (EBIT minus taxes), and the free cash flows. Remember to consider the recovery value for the software program, and the tax benefit or cost. (Assume that GAP has other profitable businesses such that tax benefits become effective.) [25%] 3 Continued…
Perot Corporation is developing a new CPU chip based on a new type of technology. Its new chip, the Patay2 chip, will take two years to develop. However, because other chip manufacturers will be able to copy the technology, it will have a market life of two years after it is introduced. Perot expects to be able to price the chip higher in the first year, and it anticipates a significant production cost reduction after the first year as well. The relevant information for developing and selling the Patay2 is given as follows: PATAY2 CHIP PRODUCT ESTIMATES Development cost $ 20,000,000 Pilot testing $ 5,000,000 Debug $ 2,800,000 Ramp-up cost $ 3,000,000 Advance marketing $ 4,600,000 Marketing and support cost $ 1,000,000 per year Unit production cost year 1 $ 655.00 Unit production cost year 2 $ 545.00 Unit price year 1 $ 820.00 Unit price year 2 $ 650.00 Sales and production volume year 1 250,000 Sales and production volume year 2 150,000 Interest rate 10 % Assume all cash flows occur…
Perot Corporation is developing a new CPU chip based on a new type of technology. Its new chip, the Patay2 chip, will take two years to develop. However, because other chip manufacturers will be able to copy the technology, it will have a market life of two years after it is introduced. Perot expects to be able to price the chip higher in the first year, and it anticipates a significant production cost reduction after the first year as well. The relevant information for developing and selling the Patay2 is given as follows: PATAY2 CHIP PRODUCT ESTIMATES Development cost $ 20,000,000 Pilot testing $ 5,000,000 Debug $ 2,700,000 Ramp-up cost $ 3,000,000 Advance marketing $ 4,400,000 Marketing and support cost $ 1,000,000 per year Unit production cost year 1 $ 655.00 Unit production cost year 2 $ 545.00 Unit price year 1 $ 820.00 Unit price year 2 $ 650.00 Sales and production volume year 1 250,000 Sales and production volume year 2…
Perot Corporation is developing a new CPU chip based on a new type of technology. Its new chip, the Patay2 chip, will take two years to develop. However, because other chip manufacturers will be able to copy the technology, it will have a market life of two years after it is introduced. Perot expects to be able to price the chip higher in the first year, and it anticipates a significant production cost reduction after the first year as well. The relevant information for developing and selling the Patay2 is given as follows: PATAY2 CHIP PRODUCT ESTIMATES Development cost $ 20,000,000 Pilot testing $ 5,000,000 Debug $ 3,000,000 Ramp-up cost $ 3,000,000 Advance marketing $ 5,000,000 Marketing and support cost $ 1,000,000 per year Unit production cost year 1 $ 655.00 Unit production cost year 2 $ 545.00 Unit price year 1 $ 820.00 Unit price year 2 $ 650.00 Sales and production volume year 1 250,000 Sales and production volume year 2…
Pliable Corporation is trying to decide when to purchase a new computer system for its offices. The company's opportunity cost of capital is 10 percent annually. Analysts have projected that the cost of the computer system will fall over time due to improvements in manufacturing methods. Analysts have also estimated the present value—as of the date of purchase—of Pliable's savings from purchasing the computer system. These savings increase with the length of delay in purchasing the computers because of anticipated enhancements over time in computer capacity and speed. The table below shows both sets of estimates. A. Find the optimal date for Pliable to purchase the computer system, assuming that the future cash flows are subject to geometrically increasing risk. Explain your reasoning and show your work. B. Suppose instead that Pliable faces risk that is just one-period-ahead and that the risk-free rate of return is 3 percent. Find the optimal date for Pliable to purchase the…
Hudson Corporation is considering three options for managing its data warehouse: continuing with its own staff, hiring an outside vendor to do the managing, or using a combination of its own staff and an outside vendor. The cost of the operation depends on future demand. The annual cost of each option (in thousands of dollars) depends on demand as follows: If the demand probabilities are 0.2, 0.5, and 0.3, which decision alternative will minimize the expected cost of the data warehouse? What is the expected annual cost associated with that recommendation? Construct a risk profile for the optimal decision in part (a). What is the probability of the cost exceeding $700,000?
You are in the mail-order business and you are considering upgrading your mail ordering system to make your operations more efficient and to increase sales. The computerized ordering system will cost $80,000 to install and has maintenance costs $20,000 each year. The system is expected to last five years with no salvage value at the end of the service period. The new order system will save $60,000 in operating costs each year and bring in additional sales revenue in the amount of $40,000 per year for the next five years. If your interest rate is 15%, find the present worth of the investment. A) $184,820.25 B) $188,172.41 C) $248,737.06 D) Answers A, B and C are not correct Maintenance money for a new building at a college is being solicited from potential alumni donors. You would like to make a donation to cover all future expected maintenance costs for the building. These maintenance costs are expected to be $50,000 each year for the first 25 years, $60,000 for each of years 26…
Perot Corporation is developing a new CPU chip based on a new type of technology. Its new chip, the Patay2 chip, will take two years to develop. However, because other chip manufacturers will be able to copy the technology, it will have a market life of two years after it is introduced. Perot expects to be able to price the chip higher in the i rst year, and it anticipates a signii cant production cost reduction after the i rst year as well. The relevant information for developing and selling the Patay2 is given below. Patay2 Chip Product EstimatesDevelopment Cost $20,000,000Pilot Testing $5,000,000Debug $3,000,000Ramp-up Cost…
Your firm is contemplating the purchase of a new $530,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 7-year life. It will be worth $75,000 at the end of that time. You will save $185,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $50,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. If the tax rate is 25 percent, what is the IRR for this project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Zoe Building Supply is considering erecting a barbed wire fence around its premises to control theft losses. The fence will cost $350,000 and have a 15-year useful life. They will also incur installation costs of $45,000. The fence is expected to reduce theft losses by $20,000 per year. The firm will no longer need the night security guard and will save $35,000 per year. Insurance premiums are expected to decrease from $65,000 per year to $50,000 per year. The fence will require annual maintenance that is estimated to cost $5,000. Zoe is in a 34% tax bracket and they have a 6% cost of capital. Should they install the fence? Use the discounted cash flow method (NPV and IRR). Show all calculations and support your recommendation with a clear explanation.
Your firm is contemplating the purchase of a new $435,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 6-year life. It will be worth $54,000 at the end of that time. You will save $157,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $43,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. If the tax rate is 23 percent, what is the IRR for this project? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. IRR 25.73 %