Question

A company is planning to acquire a new participant tracking system for a cost of $108,000. Management has already paid a consultant firm of $15,000 to recommend the best tender option out of all the possible options. The delivery and installation costs are expected to be $1,900 and $400, respectively. The monthly fees associated with the system is $960, while the annual maintenance fee is $680.  Financing costs are $3,000 per year. The new system will depreciate using an 3-year MACRS schedule, provided below. The tracking system is expected to stay relevant and useful for 5 years. The management team expects this new system to be non-transferrable at the end of the project life, but the tender company will return the deposit fee of $3,000 that was paid during the purchase of the system.

 

Year	3-year MACRS
1	33.33%
2	44.45%
3	14.81%
4	7.41%

 

The company expects the acquisition to reduce costs of each event by $4,800, and they usually have around 6 events per year. This is because they will be able to reduce the number of staff hired to control each event. It will also keep the company up-to-date in terms of the available technology among event management peers, and be able to get contracts for three additional events per year, which could increase revenues by $64,000. The tender company will provide three training sessions at an additional cost of $2,000 each, and all full-time event managers must attend before the system is used.  The marginal tax rate is 20%.

 

Currently the company has 20,000 zero coupon bonds with 10 years to maturity, that sold for 40% of the par value, 1,500,000 share of common stock, selling for $18 per share, with a beta of 1.3.  Market risk premium is 6.50%, and the risk-free rate is 1.25%. The tracking system project is a little bit less risky than the company’s usual projects, so an adjusted factor of -1.8% will be applied to the cost of capital.

 

(a) Compute all cash flows for this capital budgeting project.

 

(b) What is the NPV of the project and should the project be accepted or not?

(c) Comment on the reliability your answer in part b. What three of the possible steps that corporations can take to reduce uncertainty of the capital budgeting decision?