1. Walker & Campsey wants to invest in a new computer system, and management has narrowed the choice to Systems A and B.,,System A requires an up-front cost of $100,000, after which it generates positive after-tax cash flows of $60,000 at the end of each of the next 2 years. The system could be replaced every 2 years, and the cash inflows and outflows would remain the same.,,System B also requires an up-front cost of $100,000, after which it would generate positive after-tax cash flows of $48,000 at the end of each of the next 3 years. System B can be replaced every 3 years, but each time the system is replaced, both the cash outflows and cash inflows would increase by 10%.,,The company needs a computer system for 6 years, after which the current owners plan to retire and liquidate the firm. The company’s cost of capital is 11%. What is the NPV (on a 6-year extended basis) of the system that adds the most value?,,a. $17,298.30,b. $22,634.77,c. $31,211.52,d. $38,523.43,e. $46,143.21,,2. Last month, Smith Systems Inc. decided to accept the project whose cash flows are shown below. However, before actually starting the project, the Federal Reserve took actions that lowered interest rates and therefore Smith’s WACC. By how much did the change in the WACC affect the project’s forecasted NPV? Assume that the Fed action does not affect the cash flows, and note that a project’s projected NPV can be negative, in which case it should be rejected.,,Cash flows: ,Year 0 -$1,000 ,Year 1 $500 ,Year 2 $500 ,Year 3 $500,,,New WACC: 8.00%,Year: 0,Cash flows: -$1,000, ,a. $57.18 ,b. $60.19 ,c. $63.36 ,d. $66.69 ,e. $70.03 ,,,,
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