Problem Set 1 You are the owner of a large data-services firmand are deciding on the purchase of a new hardware cooling systemthat you expect will yield $233,300 in cost-savings per year forthe next 15 years. The installation of this cooling system willcost $3,000,000.
1. At face value, does this system seem profitable? By howmuch?
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 ahigher or lower discount rate? Why?
c. What is the IRR/ROI of this project?
d. How much should the yearly cost-savings be in order to breakeven? i. (hint) use goal-seek/what-if analysis
3. Suppose that you decide to finance the purchase of thissystem through a loan from the bank. The bank is willing to loanthis money over an 8 year term at an interest rate of 4% peryear.
a. Using a 70/30 debt-to-equity ratio, what is the NPV of thisproject? i. (hint) calculate the yearly payment using excelfunction “PMTâ€
b. How does the NPV of this project change if a larger portionis financed through equity (e.g. debt-to-equity ratio of 60/40)?Why?
