Following the arrival of corona virus your firm needs to invest in updating its software and website.
Question:
Following the arrival of corona virus your firm needs to invest in updating its software and website. The new investments, expenses and payoffs, along with other financials, can be seen in the table below. For your calculations assume that the WACC is 15%, and the tax rate is 25%. All of the values in the table are measured in pounds Sterling.
a. Calculate the incremental FCF for the upgrade.b. You forgot to consider depreciation for the new software, which according to HMRC must be calculated linearly with a useful life of 2 years and no salvage value, assuming that investments are made at the end of the year. Calculate the new incremental FCF.
c. Calculate the NPV.
d. Following encouraging news from your clients you believe that by making an extra investment of £50,000 in 2020 you can carry on forever beyond 2024, assuming that all the incremental free cash flow remains as in 2024. What is the new NPV?
e. From your solution to the exercise, what could be a way in which the government encourages firms’ to invest following the recent crisis? Give three (3) possibilities.