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Case Analysis 1 Weight 20% of total assignment

You work for a small, local telecommunications company. In five years, the company plans to undertake a major upgrade to its servers and other IT infrastructure. Management estimates that it will need up to $450,000 to cover all related costs; however, as a fairly young company, the goal is to pay for the upgrade with cash and not to take out loans.

Right now, you have $300,000 in a bank account established for Capital Investments. This account pays 6% interest, compounded annually.

A member of the finance department has approached you with an investment opportunity for the $300,000 that covers a five-year period and has the following projected after-tax cash flows:

Based on this information, answer the following questions:

1. How much money will be in the bank account if you leave the $300,000 alone until you need it in five years?

2. If you undertake the investment opportunity, what is the Nominal Payback Period?

3. Using the factors for 6% (which can be found on any PV t factor table), what is the Discounted Payback Period?

4. What is the Present Value at 6% of the investment opportunity?

5. Which option (make the investment or leave the money in a savings account) would you recommend to your CEO? Why? What additional factors/information might make you change your point of view?

Year Projected Cash Flow $94,000 $114,000 $134,000 $114,000 $94,000 4