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Finance Group Assignment Essay

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Below is an essay on "Finance Group Assignment" from Anti Essays, your source for research papers, essays, and term paper examples.

FINE 5200 |


Executive Summary

Excelerite Integrated System Inc has been using a technologically obsolete data processing system. In order to avoid heavy costs the existing installation needs to be replaced. Monster Computer Corporation (MCC) has developed the latest technology in data processing systems. They are also the largest provider of hardware and software products in the data processing field. The cost of installation is $9 million dollars, that includes computer, storage hardware and other peripherals. A financial analysis of the investment has been undertaken in this report. Extensive capital budgeting analysis has been done to justify the costs of this investment. In this analysis discounted cash flow methods and payback period approach has been used to arrive at the recommended decision. The CAPM method has been used instead of dividend growth model to calculate cost of equity. It was done because CAPM accounts for time value of money and takes systematic risk of stock into consideration. For calculating the cost of debt we have preferred the Yield to Maturity (YTM) approach over the Debt-Rating approach. Also for discounting the future cash flows, we have used a real rate of return, which extracts the average rate of inflation from past estimates. The declining method of depreciation was used and half-life convention was followed in the depreciation method. The yearly savings projections considered the probability of savings going higher or lower than the most likely saving estimates. The net present value (NPV), internal rate of return (IRR) and payback period (PB) methods have been used in analyzing the capital budgeting. In order to account for time value of money, discounted payback period method has been used to calculate payback period. The NPV that we have calculated is   $1,011,610.758, which strongly indicates that investment should be made in the new installation. The IRR was...

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