Case Analysis 1: You work for a small, local telecommunications company. In five years, the company plans to undertake a major upgrade to its servers and other IT infrastructure. Management estimates that it will need up to $450,000 to cover all related costs; however, as a fairly young company, the goal is to pay for the upgrade with cash and not to take out loans. Right now, you have $300,000 in a bank account established for Capital Investments. This account pays 4% interest, compounded annually. A member of the finance department has approached you with an investment opportunity for the $300,000 that covers a five-year period and has the following projected after-tax cash flows:
Year Projected Cash Flow
Based on this information, in an MS Word document, answer the following questions:
1) How much money will be in the bank account if you leave the $300,000 alone (earning 4% compounded interest) until you need it in five years?
2) If you undertake the investment opportunity, what is the Nominal Payback Period?
3) Using the Present Value factors for 7% (which can be found on any PV Factor table), what is the discounted Payback Period of the investment opportunity?
4) What is the Net Present Value at 7% of the investment opportunity?
5) Which option (make the investment or leave the money in a savings account) would you recommend to your CEO? Why? What additional factors/information might make you change your point of view?
As per rules I will answer the first 4 subparts of the question
1)Amount after 5 years= P*(1+r)^n
2.Cumulative cash flow in 2 years = 90000+115000 = 205000
Nominal payback = 2 years + (Initial investment-Cumulative cash flow)/ CF in year 3
= 2.7 years
3. The discounted cash flows will be as under
|Year||Cash flow||PV of cash flow||Cumulative cash flow|
Discounted payback= 3 years + (300000-294757.82)/
= 3.0138 years
4. NPV= Sum of discounted cash flows- Initial cash flow
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