Question - NSC is considering purchasing a new computer network for $72,000. It will require additional working capital of 8,000. Its anticipated seven-year life will generate additional client revenue of $31,000 annually with operating costs, excluding amortization, of $14,000. The straight-line amortization method would be used. At the end of seven years it will have a salvage value of $9,000 and return $8,000 in working capital. NSC's income tax rate is 40%.
Required:
A. If NSC has a required rate of return of 12%, what is the net present value of the proposed investment?
B. What is the point of indifference in terms of the incremental cash flow?
C. What is the payback period?
D. What is the accrual accounting rate of return?
E. Assume NSC will raise 50% of the proposed investment from the First Canadian Bank at 6%, 30% from retained earnings at 12%, and the rest of the funds from new shareholders at 14%. What is NSC's EVA for this investment?
F. Assume NSC's net income and the total assets are $60,000 and $320,000 respectively. What is NSC's residual income before the new investment and after the new investment?