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You have been asked to help a local company evaluate a major capital expenditure. The company is a new internet company and must buy a large computer...

You have been asked to help a local company evaluate a major capital expenditure. The

company is a new internet company and must buy a large computer system which will generate

additional revenue. The company provides you with the following information:

Initial cost of project $1,250,000

Depreciation method Straight-line

Salvage value $0

Residual value (sales price at end of project) $350,000

Tax rate (ordinary and capital gains tax) 35%

Incremental annual revenues in year 1 $368,000

Incremental annual expenses in year 1 $198,500

Working capital required at time of investment (t=0) $50,000

Working capital as percentage of revenue each year 12.0%

Cost of capital 12%

Economic life 10 years




Requirements:

a. Utilize both NPV and IRR. Assume that the initial $368,000 in

annual revenues will grow at a 8% annual rate and that the initial $198,500 in annual

expenses will grow at a 5% annual rate. The growth starts in year 2 from year 1, i.e. the

revenue is year 2 is $397,440, etc. Working capital is released at the end of the project.





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Hi, Please find the... View the full answer

8439628.xlsx

Solution
Capital Investment Evaluation
Year
Initial Investment
Incremental Revenue
Incremental Expenses
Working Capital
Depreciation
Residual value
Net Operating Income before Tax
Less: Income Tax...

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