Net present value of of the investment, Financial Management

Air Manchester (AM) is a new airplane manufacturer. It is considering investing in a software package, e.g. SAS, which would make its daily operations more efficient. The package costs £50,000. If the company buys the package, this will lead to yearly cost savings (prior to taxes and depreciation) of £20,000 during 4 years. The package has an economic lifetime of 4 years, and has no value at the end of its lifetime. It is depreciated according to the straightDline depreciation method (i.e. an equal amount is depreciated each year).

Prior to making the investment, AM needs to conduct some additional tests to assess the productivity and usability of the IT package. These tests will be performed by a specialised consultant that charges £4,000 (to be paid at time t=0). Five years ago the company has also spent £5,000 on a software system that will be discontinued when the new system is implemented. Moreover, the company needs to add net working capital of £1,000 immediately. This working capital can be recovered in full at the end of the software life.

The tax rate is 40% and the nominal discount rate for the investment is 10%. The yearly inflation rate is 2%. Consider initially that the entire project is financed with equity.

(a) Should AM proceed with the investment? Please provide calculations to motivate your answer.

(b) A senior executive of AM argues that this investment should be evaluated by looking at its payback period. How would you explain him/her the shortcoming of using payback period instead of NPV? Illustrate your answer using this specific investment case (i.e., use relevant figures for AM to illustrate your point).

(c) Would your results differ had you used real rather than nominal values? Why (not)? You don't need to reDdo the calculations, just provide a motivation for your answer.

(d) We assume in this problem that the new software is entirely financed by equity. Assume now that the software is partly financed by debt. Would the NPV of the investment increase or decrease, everything else equal? Justify your answer (you don't need to present the calculations, just comment on how the change in financing would affect NPV).

Posted Date: 3/15/2013 3:19:26 AM | Location : United States

Related Discussions:- Net present value of of the investment, Assignment Help, Ask Question on Net present value of of the investment, Get Answer, Expert's Help, Net present value of of the investment Discussions

Write discussion on Net present value of of the investment
Your posts are moderated
Related Questions
Q. Problem in the determine of cost of the capital? Conceptual controversies regarding the relationship between the cost of the capital and the capital structure: different the

Suppose, you are working as an investment consultant in a consultancy firm and most of your clients are habitual investors, who are maintaining their own portfolios comprising of v

Andrew Industries is contemplating issuing a 30-year bond with a coupon rate of 7% (annual coupon payments) and a face value of $1000. Andrew believes it can get a rating of A from

A legal claim on exact assets which were used to make loan secure.

how can an operating cycle be applied to a poultry business

a) Social marketing is the use of normal marketing methods to achieve the benefits of social change, such as informing the public about the harm of under-age drinking, rather than

To whom it may concern, I wanna someone to help me to get prepared for my exam. is it possible to work together? 1. Managerial Aspects of the Market for Foreign Exchange

The personnel department of a firm is entrusted with the responsibility of recruitment, training and placement of the staff for the firm. The department is also required to critica

I have an assignment due today and needs some help