Solution in XLS format, please.
Walker & Campsey wants to invest in a new computer system, and management has narrowed the choice to Systems A and B.
System A requires an up-front cost of $100,000, after which it generates positive after-tax cash flows of $60,000 at the end of each of the next 2 years. The system could be replaced every 2 years, and the cash inflows and outflows would remain the same.
System B also requires an up-front cost of $100,000, after which it would generate positive after-tax cash flows of $48,000 at the end of each of the next 3 years. System B can be replaced every 3 years, but each time the system is replaced, both the cash outflows and cash inflows would increase by 10%.
The company needs a computer system for 6 years, after which the current owners plan to retire and liquidate the firm. The company's cost of capital is 11%. What is the NPV (on a 6-year extended basis) of the system that adds the most value?
Make sure to create cash flows in the templages below as needed. Hint: Since the company needs the computer system for only 6 years you would need to consider the cash flows for only six years. Check Slid page 25, M06L02 Lecture Notes, = CapitalBudgeting.xls
Year 0 1 2 3 4 5 6
System A
NPV
Year 0 1 2 3 4 5 6
System B
NPV