BUCapital Investment Analysis

BUCapital Investment Analysis - $100,000. The new venture...

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Capital Investment Analysis Take home exam: spreadsheet to be completed on Excel International Banking Group (IBG) has had considerable success in the marketing of its franchised insurance services program to regional banking firms. Senior management has suggested that this program be expanded on a national scale to take advantage of the bank’s growing expertise in this area. In order to do this the bank will have to acquire a new computer and accounting information processing system. The cost of the computer hardware to support this venture is estimated to be $4 million. In addition to this one-time capital outlay for computer equipment, the bank estimates that it will have to acquire additional equipment costing $500,000. Both the computer and the other equipment will be depreciated under the Modified ACRS rules for a 7-year, 200 percent class asset. The expected economic life of the venture is ten years. Beyond that point in time the bank estimates the competition will force it to abandon this venture. The expected salvage value of all the new equipment, including the computer, is
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Unformatted text preview: $100,000. The new venture will require the bank to invest an additional $250,000 in its net working capital. The bank expects first year revenues from the program to be $1,400,000. These are expected to grow by $75,000 per year from year 2 through 6, and then decline by $125,000 per year from year 7 through year 10. Cash operating costs for the new venture are expected to total $225,000 during year 1 and grow at an annual rate of 6 percent per year over the 10-year life of the venture. The firms marginal tax rate for ordinary income is 40 percent. The bank requires a 10 percent after-tax rate of return on new investment projects. a. Compute the Net investment required for the insurance franchising scheme. b. Compute the annual net cash flows associated with the investment. c. What is the NPV of this project? Should IBG invest in the project based on NPV? d. What is the IRR for this project? e. What is the payback for this project? f. What is the profitability index for this project?...
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This note was uploaded on 04/15/2009 for the course BU BU225 taught by Professor Schons during the Spring '09 term at Caldwell College.

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