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Capital budgeting

See the attached file.

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:

(Table includes all the necessary information included in the attached file)

Requirements:

a. Write a letter to the president of the company explaining whether the company should acquire the computer system. Utilize both NPV and IRR. Assume that the initial $7,850,000 in annual revenues will grow at a 6% annual rate and that the initial $6,950,000 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 8,321,000, etc.

b. Redo this analysis above using sum-of-years digits depreciation method. What happens to the results and would you change your recommendation?

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Solution Preview

See attached Excel file.

a. Write a letter to the president of the company explaining whether the company should acquire the computer system. Utilize both NPV and IRR. Assume that the initial $7,850,000 in ...

Solution Summary

The solution explains how to make the accept / reject decison for the computer system

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