dmillionaire
New member
- Joined
- Sep 15, 2013
- Messages
- 49
Hey guys, currently working on a problem and need some second thoughts to see if I am on the right track.
Cost of capital = 15%
GI pays corporate taxes of 35%
Alternative A has initial software development costs
projected at $185,000, while Alternative B would cost $320,000. capital cost allowance (CCA) rate of 30 percent.
In addition, IT would hire a software consultant under either alternative to assist in making
the decision whether to invest in the project for a fee of $16,000 and this cost would be
expensed when it is incurred.
IT department would charge the
production department for the use of computer time at the rate of $375 per hour and
estimates that it would take 182 hours of computer time per year to run the new soft
ware under either alternative. GI owns all its computers and does not currently operate them
at capacity. The information technology (IT) plan calls for this excess capacity
to continue in the future. For security reasons, it is company policy not to rent excess computing capacity to outside users.
Year/ A / B
1 - $82 000 - $112 000
2 - $82 000 - $124 000
3 - $64 000 - $101 000
4 - $53 000 - $93 000
5 - $37 000 - $56 000
1.) Calculate the NPV of each and which would you recommend
2.) The CFO suspects that there is a high risk that new technology will render the
production equipment and this automation software obsolete after only three years.
Which alternative would you now recommend? (Cost savings for Years 1 to 3 would
remain the same.)
MY WORK
So ill just use alternative a as an example but I did:
PV= -185 000
n= 5
i/y= 15
Cfo = -185000
c01 = 82000
c02 = 82000
c03 = 64000
c04 = 53000
c05 = 37000
I = 15
NPV = 39087.63
If that is correct do I just do the same thing for 2.) but just use the first three years?
Thanks!
Cost of capital = 15%
GI pays corporate taxes of 35%
Alternative A has initial software development costs
projected at $185,000, while Alternative B would cost $320,000. capital cost allowance (CCA) rate of 30 percent.
In addition, IT would hire a software consultant under either alternative to assist in making
the decision whether to invest in the project for a fee of $16,000 and this cost would be
expensed when it is incurred.
IT department would charge the
production department for the use of computer time at the rate of $375 per hour and
estimates that it would take 182 hours of computer time per year to run the new soft
ware under either alternative. GI owns all its computers and does not currently operate them
at capacity. The information technology (IT) plan calls for this excess capacity
to continue in the future. For security reasons, it is company policy not to rent excess computing capacity to outside users.
Year/ A / B
1 - $82 000 - $112 000
2 - $82 000 - $124 000
3 - $64 000 - $101 000
4 - $53 000 - $93 000
5 - $37 000 - $56 000
1.) Calculate the NPV of each and which would you recommend
2.) The CFO suspects that there is a high risk that new technology will render the
production equipment and this automation software obsolete after only three years.
Which alternative would you now recommend? (Cost savings for Years 1 to 3 would
remain the same.)
MY WORK
So ill just use alternative a as an example but I did:
PV= -185 000
n= 5
i/y= 15
Cfo = -185000
c01 = 82000
c02 = 82000
c03 = 64000
c04 = 53000
c05 = 37000
I = 15
NPV = 39087.63
If that is correct do I just do the same thing for 2.) but just use the first three years?
Thanks!
Last edited: