You are analyzing the project cash flows for an investment bank that is considering creating a new asset backed securities division. The division is planning to use excess capacity on the bank’s computer system, which is currently utilized only 70% (You can assume this usage is year 1 usage); the new project will utilize 20% of the capacity in year 1. You can assume that the cost of buying a new system is currently $ 40 million, that this cost will drop 5% a year over time and that the cost will be expensed. You can also assume a tax rate of 40% and a cost of capital of 10%. If the expected growth in usage for both the new project and existing projects is 10%, estimate the opportunity cost of using the excess capacity.

Answer rating: 100% (QA)

NPV Initial investment cashflow1 rn NPV profile show various npv for projec... View the full answer