Doherty Industries Wants to Invest in a New Computer System

question 68

Multiple Choice

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

• A) $ 17,298.30
• B) $ 22,634.77
• C) $ 31,211.52
• D) $ 38,523.43
• E) $103,065.82

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Definitions:

Beneficial Effects

Positive outcomes or advantages that result from a specific action, policy, or situation.

Annual Basis

Refers to something calculated, evaluated, or occurring every year.

Computerized Surveying

The use of digital techniques and tools to conduct surveys, often leading to more efficient data collection and analysis.

Hewlett-Packard

A global technology company known for its wide range of hardware, software, and services to consumers, small- and medium-sized businesses, and large enterprises.