Question

You have been tasked with fielding an interactive video communications systems. Your job is to provide the U.S. Army with the least expensive system (for the next 5 years) from the following alternatives:

1. Intertactical. An interactive communications system designed to rely on current satellite systems. The Army must spend $10,590,843.42 now. (t = 0) and $1.7 million this year. (t = 1), increasing that investment by 13% in subsequent years for 4 additional years. (t = 2 through 5).

2. TacLine. Provides interactive communications that operate through existing phone lines. The Army must spend $4 million now (t = 0) and $3 million dollars this year (t = 1), increasing its investment by $500,000 each year thereafter for 4 additional years (t = 2 through 5).

(a) Draw and label a cash flow diagram for each of these ventures.

(b) Prepare a cash flow (CF) table in Excel for each of these ventures.

(c) Using an annual interest rate of 8%, conduct a present worth analysis for the first venture (Intertactical).

(d) Using an annual interest rate of 8%, conduct a present worth analysis for the second venture (TacLine).

(e) Are these two ventures equivalent? Why or why not?

Answer 1

Part (a)

Cash flow diagram for each of the two ventures:

For Intertactical, cash flow in year 2 = C₂ = C₁x (1 + 13%) = 1,700,000 x (1 + 13%); C₃ = C₂ x (1 + 13%) and so on

Year, t 0 1 2 3 4 5 1. Intertactical 2,771,805.14 10,590,843.42 1,700,000.00 1,921,000.00 2,170,730.00 2,452,924.90 Year, t 1 2 3 5 3,000,000 3,500,000 2. TacLine 4,000,000 4,000,000 4,500,000 5,000,000

For Tacline, C₂ = C₁+ 500,000 = 3,000,000 + 500,000 = 3,500,000 and C₃ = C₂ + 500,000 and so on

Part (b), (c), (d)

Please see the table below. All financials are in $. The cells highlighted in yellow contain the PW values. Adjacent cells in blue contain the formula in excel I have used to get the final output.

Part (e)

C E G H 45 Year, t 0 1 2 5 | 46 Part (b): Cash flows 47 1. Intertactical 2,170,730.00 10,590,843.42 1,700,000.00 1,921,000.00 2,452,924.90 2,771,805.14 3,000,000 3,500,000 4,000,000 48 2. TacLine 4,000,000 4,500,000 5,000,000 49 50 Discount rate 8% Part (c) PW of 19,224,477.86=NPV($C$50,D47:H47)+C47 51 Intertactical Part (d) PW of 52 TacLine 19,664,342.94=NPV($C$50,D48:H48)+C48

No, the two ventures are not equivalent because

• Their PWs are different
• Cash flows are different
• Cash flow patterns are different, Tactical has higher cost upfront at t = 0