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

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Walker & Campsey wants to invest in a new computer system,and management has narrowed the choice to Systems A and B. System Arequires an up-front cost of $125,000, after which it generatespositive after-tax cash flows of $80,000 at the end of each of thenext 2 years. The system could be replaced every 2 years, and thecash inflows and outflows would remain the same. System B alsorequires an up-front cost of $125,000, after which it wouldgenerate positive after-tax cash flows of $60,000 at the end ofeach of the next 3 years. System B can be replaced every 3 years,but each time the system is replaced, both the cash outflows andcash inflows would increase by 5%. The company needs a computersystem for 6 years, after which the current owners plan to retireand liquidate the firm. The company's cost of capital is 12%. Whatis the NPV (on a 6-year extended basis) of the system that adds themost value?

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3.7 Ratings (595 Votes)

System B is better with a higher NPV at3271191The NPVs areSystem See Answer

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Walker & Campsey wants to invest in a new computer system,and management has narrowed the choice to Systems A and B. System Arequires an up-front cost of $125,000, after which it generatespositive after-tax cash flows of $80,000 at the end of each of thenext 2 years. The system could be replaced every 2 years, and thecash inflows and outflows would remain the same. System B alsorequires an up-front cost of $125,000, after which it wouldgenerate positive after-tax cash flows of $60,000 at the end ofeach of the next 3 years. System B can be replaced every 3 years,but each time the system is replaced, both the cash outflows andcash inflows would increase by 5%. The company needs a computersystem for 6 years, after which the current owners plan to retireand liquidate the firm. The company's cost of capital is 12%. Whatis the NPV (on a 6-year extended basis) of the system that adds themost value?