Alpha & Omega wants to invest in a new computer system, and management has narrowed the...

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Alpha & Omega wants to invest in a new computer system, andmanagement has narrowed the choice to Systems A and B.
System A requires an up-front cost of $100,000, after which itgenerates positive after-tax cash flows of $70,000 at the end ofeach of the next 2 years. The system could be replaced every 2years, and the cash inflows and outflows would remain the same.
System B also requires an up-front cost of $100,000, after whichit would generate positive after-tax cash flows of $48,000 at theend of each of the next 3 years. System B can be replaced every 3years, but each time the system is replaced, both the cash outflowsand cash inflows would increase by 10%.
The company needs a computer system for 6 years, after which thecurrent owners plan to retire and liquidate the firm. The company'scost of capital is 14%. What is the NPV (on a 6-year extendedbasis) of System A? Enter your answer rounded to two decimalplaces. Do not enter $ or comma in the answer box. For example, ifyour answer is $12,300.456 then enter as 12300.46 in the answerbox.

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4.4 Ratings (651 Votes)

Calculation of NPV of System A
Year	0	1	2	3	4	5	6
Up front cost	- 100,000.00		- 100,000.00		- 100,000.00
After tax cash flows		70,000.00	70,000.00	70,000.00	70,000.00	70,000.00	70,000.00
Net Cash flows	- 100,000.00	70,000.00	- 30,000.00	70,000.00	- 30,000.00	70,000.00	70,000.00
x Discount Factor @ 14%	1	0.877193	0.769467528	0.6749715	0.592080277	0.5193687	0.4555865
Present Values	- 100,000.00	61,403.51	- 23,084.03	47,248.01	- 17,762.41	36,355.81	31,891.06
Net Present Value (NPV)	36,051.95

The NPV (on a 6-year extended basis) of System A			36,051.95

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Transcribed Image Text

Alpha & Omega wants to invest in a new computer system, andmanagement has narrowed the choice to Systems A and B.System A requires an up-front cost of $100,000, after which itgenerates positive after-tax cash flows of $70,000 at the end ofeach of the next 2 years. The system could be replaced every 2years, and the cash inflows and outflows would remain the same.System B also requires an up-front cost of $100,000, after whichit would generate positive after-tax cash flows of $48,000 at theend of each of the next 3 years. System B can be replaced every 3years, but each time the system is replaced, both the cash outflowsand cash inflows would increase by 10%.The company needs a computer system for 6 years, after which thecurrent owners plan to retire and liquidate the firm. The company'scost of capital is 14%. What is the NPV (on a 6-year extendedbasis) of System A? Enter your answer rounded to two decimalplaces. Do not enter $ or comma in the answer box. For example, ifyour answer is $12,300.456 then enter as 12300.46 in the answerbox.