Your client's father is investigating the possibility of installing a new operation system to enhance the...
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Your client's father is investigating the possibility of installing a new operation system to enhance the communication and data sharing across different division in his company. You have been given the following information for evaluation: CAPEX / Initial Outlay Installation cost Project life Operating Expense Revenue (per year) Variable costs Investment in Net Working Capital (Year 0) Project A $400,000 $5,000 5 years $75,000 $300,000 $100,000 $50,000 Project B $250,000 $10,000 5 years $100,000 $400,000 $200,000 $100,000 The company's tax rate is 30% and it employs a straight line depreciation method. The operation system will not have any value at the end of the project's life. The company also has a required rate of retumn equal to 9% per annum. REQUIRED: a) Determine the Free Cash Flows (FCFS), for each year, to the firm for both projects. b) Based on your calculated FCFs, calculate the Net Present Value of the project and identify which of the projects you would recommend. c) Identify and discuss the major disadvantage of the NPV criterion for choosing projects. Within your discussion provide a brief explanation as to how the disadvantage may affect the valuation of the project. Your client's father is investigating the possibility of installing a new operation system to enhance the communication and data sharing across different division in his company. You have been given the following information for evaluation: CAPEX / Initial Outlay Installation cost Project life Operating Expense Revenue (per year) Variable costs Investment in Net Working Capital (Year 0) Project A $400,000 $5,000 5 years $75,000 $300,000 $100,000 $50,000 Project B $250,000 $10,000 5 years $100,000 $400,000 $200,000 $100,000 The company's tax rate is 30% and it employs a straight line depreciation method. The operation system will not have any value at the end of the project's life. The company also has a required rate of retumn equal to 9% per annum. REQUIRED: a) Determine the Free Cash Flows (FCFS), for each year, to the firm for both projects. b) Based on your calculated FCFs, calculate the Net Present Value of the project and identify which of the projects you would recommend. c) Identify and discuss the major disadvantage of the NPV criterion for choosing projects. Within your discussion provide a brief explanation as to how the disadvantage may affect the valuation of the project.
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Lets calculate the Free Cash Flows FCFs and the Net Present Value NPV for both Project A and Project B a Determine the Free Cash Flows FCFs for each y... View the full answer
Related Book For
Auditing A Practical Approach with Data Analytics
ISBN: 978-1119401742
1st edition
Authors: Raymond N. Johnson, Laura Davis Wiley, Robyn Moroney, Fiona Campbell, Jane Hamilton
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