Question

You manage a software company that requires internet bandwidth to produce output. Currently your company is...

You manage a software company that requires internet bandwidth to produce output. Currently your company is using 71% of its capacity, but is considering an expansion to utilize the additional bandwidth. Doing so will require $12,000 in additional expenditures per year forever, and generate $29,000 additional profits each year forever. The expansion will require a one time cost of $100,000. What is the NPV of undertaking this expansion project? Assume a cost of capital of 15.1%

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Answer #1

Step 1:

Initial Investment = $100,000

Cost of Capital = 15.1%

Project annual additional profits = $29,000

Project annual additional expenditure = $12,000

Net Annual Cash flow = Project annual additional profits - Project annual additional expenditure

= $29,000 - $12,000

= $17,000

Step 2:

Present value of cash flows = Net Annual Cash Flow / Cost of Capital

= $17,000 / 15.1%

= $112,581.781

NPV of the Project = Present value of cash flows - Initial Investment

= $112,581.781 - $100,000

= $12,581.78

Therefore, NPV of the undertaking the expansion is $12,581.78

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