The management team has found a company that can provide an improved computer. With this improvement, the management team believes the company’s revenues will increase in the first year by $25 million, by $7 million in the second year, then by $2 million per year in years three, four and five. The charge for the improved capability will cost Tesla $100 million (including license fee) in the first year, with a flat license and maintenance fee of $10 million in years two through five. The team accounted for inflation in their figures and is very confident of the estimated costs and revenue.
The President wants you to look at these figures and advise him on a decision. Assume that Tesla’s CFO can borrow money at a rate of 5% per year, and that rate holds over the life of this project. All costs come at the end of the year.
Company should accept the project is the present value from the project is positive
| Year | Revenue | Improvement charges | Maintenance charges and fees | Net cash flows | Present value factor at 5 % |
Amount |
| 1 | 25 | (100) | - | 75 | 0.9524 | (71.43) |
| 2 | 32 | - | (10) | 22 | 0.9070 | 19.95 |
| 3 | 34 | - | (10) | 24 | 0.8638 | 20.73 |
| 4 | 36 | - | (10) | 26 | 0.8227 | 21.39 |
| 5 | 38 | - | (10) | 28 | 0.7835 | 21.94 |
| Total | 12.58 |
Since the present value is positive company should accept the project
The President of Tesla was really impressed by your analysis on market reactions and wants more...
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Spencer’s Outfitters: All Kinds of Clothing for All Kinds of People Spencer’s Outfitter’s: All Kinds of Clothing for All Kinds of People is one of the largest wholesale clothing companies in the United States with headquarters in a large Eastern U.S. city. About two years ago, to help cover an area not previously represented in its chain, SO purchased a small wholesale clothing company: Ozzie’s Outfits in the South and made it a company division. The company president, Professor Mangum,...
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Operations Brony’s Bikes was incorporated more than 30 years ago to manufacture ten-speed touring bikes. An exercise bike and mountain bikes later added to the product line. Currently, the company manufactures the following products: Grand Prix: Ten-speed touring bike Phoenix: Deluxe eighteen-speed racing bike Pike’s Peak: Twelve-speed mountain bike Himalaya: Eighteen-speed deluxe mountain bike Waistliner: Stationary exercise bike All of these products are manufactured in a single facility, which is located in eastern Texas. Derailleurs (front and rear) comprise a...