1) Doherty Industries wishes to invest in the new computer system. Company only wishes to invest in one system, and has narrowed choice down to System A and System B.
System A needs the up-front cost of= $100,000 and then creates positive after-tax cash flows of= $60,000 at the end of each of next 2 years. System can be replaced every two years with cash inflows and outflows remaining same.
System B also needs an up-front cost of= $100,000 and then creates positive after-tax cash flows of= $48,000 at ending of each of next three years. System B can be replaced every 3 years, but each time system is replaced, both cash inflows and outflows rise by 10%.
Company requires a computer system for the 6 years, after which time the current owners plan on retiring and liquidating firm. The company's cost of capital is 11%. Find out NPV (on a six-year extended basis) of system that creates most value to company?
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