finance question

Project Description:

as a financial analyst at minor interantional you have been asked to evaluate two capital investemnt alternatives subnmited by the production department of the firm. before beginning your inalysis, you note that company policy has set the set cost of capital at 15 % for all proposed projects. as a small business, mi pays corporate taxes at the rate of 35%.

the proposed capital project calls for developing new computer software to facilitate partial automation of production in mi's plant. alternative a has initial software development costs projectead at $185000, while alternative b would cost $320000. soft ware development costs would be capitalized and qualify for a capital coast allowance (cca) rate of 30 percent. in addition, it would hire a software consultant under either alternative to assist in making the decision whether to invest in the project for a fee of $16000 and this cost would be expensed when it is incurred.

to recover its costs, mi's it department would charge the production department for the use of computer time at the rate of $375 per hour and estimates that it would take 182 hours of computer time per year to run the new software under ethier alternative. mi owns all its computers and does not currently operate them at capacity. the information technology plan calls for this excess capacity to containue in the future. for security resons, it is company policy not to rent excess computing capacity to outside users.

if the new partial automation of production is put in place, expected savings in production cost (before tax) are projected as follows:

year alternative a alternative b

1 $82,000 $112,000
2 82,000 124,000
3 64,000 101,000
4 53,000 93,000
5 37,000 56,000

as the capital budgeting analyst, you are required to answer the following in your memo to the production department.

a) calculate the net present value of each fo the alternatives. which would you recomend?

b) the cfo suspects that there is a hish risk that new technology will render the production equipment and this automation software obsolete after only three years. which alternative would you now recomend?(cost savings for years 1 to 3 would remain the same.)

c) mi could use excess resources in its engineering department to develop a way to eliminate this step of the manufacturning process by the end of year 3. the salvage value of the equipemnt( including any cca and tax inpact) would be $50,000 at the end of year 3, $35,000 at the end of year 4, and zero after five years. should engineering develop the solution and remove the equipment before the five years are up? which alternative? when?
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Price Type: Negotiable

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