South Tel Communication
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South Tel Communication is considering a purchase of a new software management system. The system is called B-Image, and it is expected to drastically reduce the amount of time that company technicians spend installing new software. South Tel's technicians currently spend 6000 hours a month on installations, which cost South Tel $25 per hour. The owners of the B-Image system claim that their software can reduce time on task by at least 25%. The system requires an initial investment of $55,000 and an additional investment of $10,000 for technician training on the new system. Annual upgrades will cost the firm $15,000 per year. Since the investment is comprised of software, it can be expensed fully in the year of the expenditure (i.e., no depreciation). South Tel faces a 30 % tax rate and uses a 9% cost of capital to evaluate projects of this type.
a. Assuming that South Tel has sufficient taxable income from other projects so that it can expense the cost of the software immediately, what are the project free cash flows (PFCFs) for the project for years 0 through 5?
b. Calculate the NPV and IRR for the project.
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Calculate free cash flow (PFCF), NPV and IRR
South Tel Communication is considering a purchase of a new software management system. The system is called B-Image, and it is expected to drastically reduce the amount of time that company technicians spend installing new software. South Tel's technicians currently spend 6000 hours a month on installations, which cost South Tel $25 per hour. The owners of the B-Image system claim that their software can reduce time on task by at least 25%. The system requires an initial investment of $55,000 and an additional investment of $10,000 for technician training on the new system. Annual upgrades will cost the firm $15,000 per year. ...
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