Question

Data Corp needs to buy new equipment to pursue new business lines in order to increase its value. The company has two options:

Question 3 (15 points) (Capital Budgeting) Data Corp needs to buy new equipment to pursue new business lines in order to increase its value. The company has two options: Expected Life (yrs) Option Initial Expected Main. Costs Investment Rev (per yr) (per yr) 15,000 6,000 3,000 20,000 5,000 2.100 Salvage Value 6,000 13,000 6 Also assume Option B will get a tax rebate of $2,000 in year 4 and $1,500 in year 8. Data Corp has a beta of 1.3, the risk free-rate is 2.5% and the market risk premium is 8%. A. Calculate the IRR and NPV of each option B. Which strategic decision should Data Corp make? Why?

Answer 1

Option A - NPV & IRR is $778 & 12.1%. OPTION B NPV & IRR is $4802 & 14.7% . B is better than A for both parameters

Pls fund attached from spreadsheet

CAPITAL BUDGETING OPTION A year 1 2 3 4 5 6 Salvage NPV 0 (15,000) IRR 3000 3000 3000 3000 3000 3000 Cash flow (15,000) 3,000 3,000 3,000 3,000 6000 $778 12.1% OPTION B 1 2 3 4 5 6 7 8 9 10 11 12 13 Salvage IRR (20,000) 2900 2900 2900 2900 2900 2900 2900 2900 2900 2900 2900 2900 2900 Cash flow (20,000) 2,900 2,900 2,900 2,900 2,900 2,900 2,900 2,900 2,900 2,900 2,900 13000 $4,802 14.7% 4,900 2,000 4,400 1,500