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LEM, Inc. provides cable television access to individual households for a fee of $30 per month. The president of LEM, Mr. E. Lewis, is considering offering a new service to his customers, internet access, for an additional $25 a month. Mr. Lewis has been notified that you have completed the Cases in Finance course at Duquesne and he has asked you to advise him on whether or not to expand his business. He has provided you with the information below. In addition, Mr. Lewis has asked you to assume that the expenditures necessary to offer internet service occur at time zero, and that cash flows from the expansion occur at the end of each year, beginning in year one. Assume a three-year horizon. Estimate the incremental cash flow from assets generated by the internet service, the net present value, the IRR, and the payback period. Should LEM offer the new service? Explain. Cash flows from operations. If LEM offers the internet service it will need to purchase additional computers and cables. The computers and cables will cost $525,000. This amount is to be depreciated using the straight-line method over a three-year life, to a zero salvage value. LEM's tax rate is 40%. LEM's opportunity cost of capital is 12.6%. Currently, there is no inflation. However, inflation is expected to be 2% per year in year 2 as well as in year 3. The company currently has 4000 customers subscribing to its cable television service. Mr. Lewis estimates 75% of these customers will also elect to receive internet access. In addition, he feels that the internet access will attract 500 new customers who are expected to subscribe to both the cable television and internet access. The variable costs associated with the internet access will be $4.00 per customer per year. This includes the additional employees, fuel, and expense of running the computer, but does not include the lease expense of the trucks. LEM leases ten trucks at a monthly cost of $500 per truck. This expense cannot be depreciated. If LEM starts the internet service they will need a new line of bigger trucks. An automobile dealership has offered to release LEM from its current lease and to replace the current lease with a new one. The new lease provides the ten trucks at a cost of $750 per truck per month. The lease payments will increase in the future with inflation. The new computer would be installed in a room of the company's warehouse that is currently vacant and does not require any improvements. If the computer is not housed in this room, LEM could rent the space to an outsider at a rate of $1,000 per month LEM has spent $15,000 on market research to determine the potential for this business. With current operations (i.e. just cable television), LEM's pre-tax income is 20% of its revenues. Change in long-term assets: Mr. Lewis is confident that at the end of the third year, parts of the computer can be sold for $25,000. Because the computer is to be depreciated to a zero salvage value, this amount represents taxable income. Changes in net working capital: LEM's inventory for this expansion would consist of 500 modems. These modems are already owned by the firm. Their current market value is $100 each. Their market value at the end of three years is also $100. In years 1 and 2, LEM will allow customers to pay for the internet service with a six-month delay. This implies that at the end of years 1 and 2, accounts receivable will be equal to 50% of the year's sales. The company does not have this policy in year 3. LEM, Inc. provides cable television access to individual households for a fee of $30 per month. The president of LEM, Mr. E. Lewis, is considering offering a new service to his customers, internet access, for an additional $25 a month. Mr. Lewis has been notified that you have completed the Cases in Finance course at Duquesne and he has asked you to advise him on whether or not to expand his business. He has provided you with the information below. In addition, Mr. Lewis has asked you to assume that the expenditures necessary to offer internet service occur at time zero, and that cash flows from the expansion occur at the end of each year, beginning in year one. Assume a three-year horizon. Estimate the incremental cash flow from assets generated by the internet service, the net present value, the IRR, and the payback period. Should LEM offer the new service? Explain. Cash flows from operations. If LEM offers the internet service it will need to purchase additional computers and cables. The computers and cables will cost $525,000. This amount is to be depreciated using the straight-line method over a three-year life, to a zero salvage value. LEM's tax rate is 40%. LEM's opportunity cost of capital is 12.6%. Currently, there is no inflation. However, inflation is expected to be 2% per year in year 2 as well as in year 3. The company currently has 4000 customers subscribing to its cable television service. Mr. Lewis estimates 75% of these customers will also elect to receive internet access. In addition, he feels that the internet access will attract 500 new customers who are expected to subscribe to both the cable television and internet access. The variable costs associated with the internet access will be $4.00 per customer per year. This includes the additional employees, fuel, and expense of running the computer, but does not include the lease expense of the trucks. LEM leases ten trucks at a monthly cost of $500 per truck. This expense cannot be depreciated. If LEM starts the internet service they will need a new line of bigger trucks. An automobile dealership has offered to release LEM from its current lease and to replace the current lease with a new one. The new lease provides the ten trucks at a cost of $750 per truck per month. The lease payments will increase in the future with inflation. The new computer would be installed in a room of the company's warehouse that is currently vacant and does not require any improvements. If the computer is not housed in this room, LEM could rent the space to an outsider at a rate of $1,000 per month LEM has spent $15,000 on market research to determine the potential for this business. With current operations (i.e. just cable television), LEM's pre-tax income is 20% of its revenues. Change in long-term assets: Mr. Lewis is confident that at the end of the third year, parts of the computer can be sold for $25,000. Because the computer is to be depreciated to a zero salvage value, this amount represents taxable income. Changes in net working capital: LEM's inventory for this expansion would consist of 500 modems. These modems are already owned by the firm. Their current market value is $100 each. Their market value at the end of three years is also $100. In years 1 and 2, LEM will allow customers to pay for the internet service with a six-month delay. This implies that at the end of years 1 and 2, accounts receivable will be equal to 50% of the year's sales. The company does not have this policy in year 3