Answer Happy

(c) A commodity broker is contemplating the acquisition of a new computer-driven management information system (MIS). The hardware for this would cost an initial £4 million, whilst software and staff training would cost £1 million for each of the first two years operation, and £200 000 per year thereafter. After six years, the system would be due for replacement. However scrapping the current (manual) system would save staff costs of £1.5 million each year. To finance the new investment the broker would use a combina- tion of debt and equity capital in the ratio 1:3. The broker can borrow at an interest rate of 10%, whilst interest paid can be set against the corporation tax liability (currently taxed at 30%). The broker is a listed company with a current share price of £3.00, and current dividend of 15 pence. Over the period the share price is expected to grow at an annual rate of 6%. Use the above information to evaluate investment in the new