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    Capital Budgeting

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    Forecasting and Valuing Cash Flows

    2-6) CT Computers is considering whether or not to begin offering customers the option to have their old personal computers recycled when they purchase a recycling system. The recycling system would require that CT invest $600,000 to purchase grinder and magnets to use in the recycling process. The company estimates that for each system it recycles it would generate $1.50 in incremental revenues from the sale of scrap metal and plastics. The machinery has a five-year useful life and will be depreciated straight line toward a zero salvage value. CT believes that in Year 1 it will recycle 100,000 personal computers and that returns will grow by 25% each year over the next five years. The company uses a 15% discount rate to analyze its capital expenditures and faces a 30& tax rate.

    a) What are the project free cash flows (PFCFs) for this project?

    b) Using NPV and IRR, should CT invest in this project?

    c) Judy Dunbar, the manager for the project, is worried that CT will only have returns of 75,000 units in Year 1. If she's right, and assuming a growth rate of 25% should CT still consider investing in the project?

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    Solution Summary

    The solution explains the calculation of free cash flows, NPV and IRR for the project.