Problem Set 1
You are the owner of a large data-services firm and are decidingon the purchase of a new hardware cooling system that you expectwill yield $233,300 in cost-savings per year for the next 15 years.The installation of this cooling system will cost $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 theyearly cost-savings be in order to break even? i. (hint) usegoal-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% per year.a. Using a 70/30 debt-to-equity ratio, what is the NPV of thisproject? i. (hint) calculate the yearly payment using excelfunction “PMT†b. How does the NPV of this project change if alarger portion is financed through equity (e.g. debt-to-equityratio of 60/40)? Why?
