Hindustan Liver Ltd. is planning to manufacture computers and is planning to invest in new software. You need to analyze whether the company should invest in this proposal

• The company will have to spend $5 million to commercially develop the software, and the investment will be depreciated straight-line over 4 years to a salvage value of $1 million at the end of the 4th year.

• The company spend $10,000 on a market study. Based on that, the company concludes that it can generate revenues of $6 million every year for the next 4 years. The operating expenses (other than depreciation) are expected to be 60% of the revenues each year

• The company additionally plans to invest $5,000 towards selling and administration expenses to make sure the software receives recognition • The working capital is 10% of revenues each year starting in year 1.

• The tax rate is 40% and the discount rate is 8%.

Would you suggest taking up the proposal?

Answer rating: 100% (QA)

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