The consulting company Harris White & Jackson (HW J) is in that never-ending budgeting phase of the year. Realizing that they couldn't defer a technology update any longer, the managers plan to replace all of the computers in the office. The old computers will be sold for market value. When the new computers reach the end of their useful lives, they will be sold as well. The cost of the combined new computers and annual software updates should be more than covered by efficiency gains and increased volume of sales - at least that's what the managers are expecting. Information related to this investment is as follows. Cost of new computers Salvage value of new computers at end of useful life Life of new computers (years) Market value of old computers today (equal to book value) Annual software update cost (necessary for all computers, old or new) Annual operating cash inflows from efficiency gains and increased sales due to new computers Minimum required rate of return Applicable tax rate $25,400 $2,400 5 $2,000 $3,200 $9,500 5% 24%

The consulting company Harris White & Jackson (HW J) is in that never-ending budgeting phase of the year. Realizing that they couldn't defer a technology update any longer, the managers plan to replace all of the computers in the office. The old computers will be sold for market value. When the new computers reach the end of their useful lives, they will be sold as well. The cost of the combined new computers and annual software updates should be more than covered by efficiency gains and increased volume of sales - at least that's what the managers are expecting. Information related to this investment is as follows. Cost of new computers Salvage value of new computers at end of useful life Life of new computers (years) Market value of old computers today (equal to book value) Annual software update cost (necessary for all computers, old or new) Annual operating cash inflows from efficiency gains and increased sales due to new computers Minimum required rate of return Applicable tax rate $25,400 $2,400 5 $2,000 $3,200 $9,500 5% 24%

Essentials of Business Analytics (MindTap Course List)

2nd Edition

ISBN:9781305627734

Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Chapter15: Decision Analysis

Section: Chapter Questions

Problem 5P: Hudson Corporation is considering three options for managing its data warehouse: continuing with its...

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The consulting company Miller Davis & Brown (M D B) is in that never-ending budgeting phase of the year. Realizing that they couldn’t defer a technology update any longer, the managers plan to replace all of the computers in the office. The old computers will be sold for market value. When the new computers reach the end of their useful lives, they will be sold as well. The cost of the combined new computers and annual software updates should be more than covered by efficiency gains and increased volume of sales—at least that’s what the managers are expecting. Information related to this investment is as follows. Cost of new computers $25,400 Salvage value of new computers at end of useful life $2,400 Life of new computers (years) 5 Market value of old computers today (equal to book value) $1,900 Annual software update cost (necessary for all computers, old or new) $2,800 Annual operating cash inflows from efficiency gains and increased sales due to new…
Capital budgeting GAP, a retail chain, is considering buying a registered software from Microsoft so that it can more effectively deal with its retail sales. The software costs $750,000 and will be depreciated down to zero using the straight-line method over its five-year economic life. The marketing department predicts the sales will be $600,000 per year for the next three years, after which the market will cease to exist. The cost of one unit sold and operating expenses are predicted to be 25% of sales. After three years the software can be sold for $400,000. The GAP also needs to add net working capital of $25,000 immediately and maintain it for the next two years. The corporate tax rate is 35%. a) Compute the unlevered net income (EBIT minus taxes), and the free cash flows. Remember to consider the recovery value for the software program, and the tax benefit or cost. (Assume that GAP has other profitable businesses such that tax benefits become effective.) [25%] 3 Continued…
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