Reference no: EM132819188

Problem 1: You were recently hired as head of technology for ABC Inc. Five years ago the firm spent $1,000,000 on hardware which you believe to be outdated. You plan on replacing the hardware with new, faster models and are concerned as to how management will react to the large price tag. The new investment is estimated to cost $3,590,000 which includes equipment, installation and training. You estimate a four-year useful life. Given the greater speed of the new hardware, you believe units sold in the firm would rise by 350,000 and are estimated to sell at $13 each. It costs $5 per unit to produce and new marketing and selling costs will be $1,500,000 per year. Start-up net working capital is estimated at $90,000. After four-years, you estimate replacing the equipment and believe you can sell it for $200,000. The current tax rate is 21% and the required rate of return is 9%. Explain the meaning of all three components in relation to the answers you calculated. The discount rate is referred to as the required rate of return. It can also be called the cost of capital. Explain why the two terms are interchangeable