Answer Happy

As a senior analyst for the company you have been asked to
evaluate a new IT software project. The company has just paid a
consulting firm $100,000 for a test marketing analysis. After
looking at the project plan, you anticipate that the project will
need to acquire computer hardware for a cost of $450,000. The
Australian Taxation Office rules allow an effective life for the
computer hardware of five years. The equipment can be depreciated
on a straight-line (prime cost) basis and there is no expected
salvage value after the five years.
Your company does not have any available space where the project
can be located for five years and you anticipate to rent the
required office space it would cost $65,000 per year for the life
of the project. You expect that the project will need to hire 3 new
software specialists at $50,000 (each specialist) per year (start
in year 1) for the full five years to work on the software.
The project will use a van currently owned by the company.
Although the van is not currently being used by the company,
it can be rented out for $15,000 per year for five years. The book
value of the van is $20,000. The van is being depreciated
straight-line (with five years remaining for depreciation) and is
expected to be worthless after the five years.
Expected annual marketing and selling costs will be incurred
during the life of the project (5 years), with the first year
expecting to be $250,000. The produced software is expected to sell
at $85 per unit while the cost to produce each unit is $40. You
expect that 10,000 units will be sold in the first year and the
number of units sold will increase by 25% a year for the remaining
four years. The project will need working capital of $50 000 to
commence the business (in year 0) and the investment in working
capital is to be completely recovered by the end of the project’s
life (in year 5). The company tax rate is 30%, and the discount
rate is 10.5%.
Based on the information presented above, answer the following
questions (1) – (3).
Calculate the NPV and IRR of the project. Should the project be
accepted? Show workings and explain your answer(s).
Students may present the workings using the
table below. Please set out your work
clearly and neatly. If you choose you can take advantage of the
table below or you can continue your workings on the following page
which has been intentionally left blank.