Question

WWC provides information technology support to small businesses by recommending and installing hardware. The leadership team wants to launch a new division that develops custom software for small businesses, and the team is developing a business plan for the unit. (This question has two parts.) a. The marketing vice president notes that if they provide custom software to a business, they would be more likely to also get a hardware support contract if the customer likes the software. The finance vice president says the business plan should only consider the cash flows that come directly from selling the custom software. Who is right and why? (2-3 sentences) b. After estimating the cash flows, the team then discusses what required return should be used for the new project. The finance vice president finds that public firms that make custom software have higher betas than firms that do hardware, and believes they need to adjust the required return for the project. The marketing vice president doesn’t see any need to use any required return other than WWC’s WACC. Who is right and why? (2-3 sentences)

Answer 1

Question No. a

The company should include the Cash Flows from selling the Custom Software because we will not be able to know whether the Business of Custom Made Software is profitable or not and additional amount invested in making Custom Softwares is able to receive the expected rate of return on the Investment.

Question No. b

The Company can recalculate the WACC using the revised Beta of Company because there was a change in the risks involved in the New Project of Providing Custom Softwares which are different from the existing business of supplying the technology support