Frisco Enterprises is considering the purchase of a new software management system. The system is called FK1. The FK1 will drastically reduce the amount of time the Frisco Enterprises employees installing new software. The employees currently spend 6,000 hours per year on installations.
The average rate per employee on the installation is $25 per hour. There is a claim that the FK1 will reduce the installation of software by 25%. The FK1 requires an initial investment of $55,000 and an additional investment of $10,000 for training the employees who installs the software.
In addition there is an additional cost of $15,000 per year for upgrades. The tax treatment of the software requires amortization of the initial cost of the software (FK1). At times the cost can be expensed during the year of purchase. Frisco Enterprise has determined that it will expense the cost of the FK1 in the year of the expenditure.
The current tax rate is 30%. There is a 9% cost of capital to evaluate projects of this type.
(Assume that Frisco Enterprises has sufficient taxable income from other projects so that it can expense the software immediately). Your answer must be computed utilizing Excel.
Requirement:
(a) What are the free cash flows for the project for years 1 through 5? (The free cash flow is the same for each year 1 to 5) Therefore only one numeric answer is required.
(b) What is Net Present Value?
(c) What is Internal Rate of Return?