Telecommunications company

Telecommunications company

You work for a small, local telecommunications company. In five years, the company plans to undertake a major upgrade to its servers and other IT infrastructure. Management estimates that it will need up to $450,000 to cover all related costs; however, as a fairly young company, the goal is to pay for the upgrade with cash and not to take out loans. Right now, you have $300,000 in a bank account established for Capital Investments. This account pays 6% interest, compounded annually. A member of the finance department has approached you with an investment opportunity for the $300,000 that covers a five-year period and has the following projected after-tax cash flows:  

Year Projected Cash Flow  

1 $94,000  

2 $114,000  

3 $134,000  

4 $114,000  

5 $94,000  

Based on this information, answer the following questions: 1) How much money will be in the bank account if you leave the $300,000 alone until you need it in five years?

2) If you undertake the investment opportunity, what is the Nominal Payback Period?

3) Using the factors for 6%, what is the Discounted Payback Period?

4) What is the Net Present Value of this investment opportunity?

5) Which option – make the investment or leave the money in a savings account – would you recommend to your CEO? Why? What additional factors/information might make you change your point of view?

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