You are the owner of a large data-services firm and are deciding on the purchase of a new hardwarecooling system that you expect will yield $233,300 in cost-savings per year for the next 15 years. Theinstallation of this cooling system will cost $3,000,000. Additionally, O&M expenditures for the collingsystem are expected to be $2,120 per year.1. At face value, does this system seem profitable? By how much?2. Assume that your company uses a discount rate of 6%.a. What is the Net Present Value (NPV) of this project?b. How does the NPV of this project change as you assume a higher or lower discountrate? Why?c. What is the IRR/ROI of this project?d. How much should the yearly cost-savings be in order to break even?i. (hint) use goal-seek/what-if analysis3. Suppose that you decide to finance the purchase of this system through a loan from the bank.The bank is willing to loan this money over an 8 year term at an interest rate of 4% per year.a. Using a 70/30 debt-to-equity ratio, what is the NPV of this project?i. (hint) calculate the yearly payment using excel function “PMT”b. How does the NPV of this project change if a larger portion is financed through equity(e.g. debt-to-equity ratio of 60/40)? Why? use excel
You are the owner of a large data-services firm and are deciding on the purchase of a new hardware
cooling system that you expect will yield $233,300 in cost-savings per year for the next 15 years. The
installation of this cooling system will cost $3,000,000. Additionally, O&M expenditures for the colling
system are expected to be $2,120 per year.
1. At face value, does this system seem profitable? By how much?
2. Assume that your company uses a discount rate of 6%.
a. What is the
b. How does the NPV of this project change as you assume a higher or lower discount
rate? Why?
c. What is the
d. How much should the yearly cost-savings be in order to break even?
i. (hint) use goal-seek/what-if analysis
3. Suppose that you decide to finance the purchase of this system through a loan from the bank.
The bank is willing to loan this money over an 8 year term at an interest rate of 4% per year.
a. Using a 70/30 debt-to-equity ratio, what is the NPV of this project?
i. (hint) calculate the yearly payment using excel function “PMT”
b. How does the NPV of this project change if a larger portion is financed through equity
(e.g. debt-to-equity ratio of 60/40)? Why?
use excel
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