THỰC HÀNH BUỔI 5

1. Steve’s Sub Stop (Steve’s) is considering investing in toaster ovens for each of its 150 stores
located in the southwestern United States. The high-capacity conveyor toaster ovens,
manufactured by Lincoln, will require an initial investment of $16,000 per store plus $700 in
installation costs. The new capital (including the costs for installation) will be depreciated over
five years using straight-line depreciation toward a zero salvage value. Steve’s will also incur
additional maintenance expenses totaling $130,000 per year to maintain the ovens. At present,
firm revenues for the 150 stores total $11 million, and the company estimates that adding the
toaster feature will increase revenues by 10%.
a. If Steve’s faces a 25% tax rate, what expected project FCFs for each of the next five years will
result from the investment in toaster ovens?
b. If Steve’s uses a 11% discount rate to analyze its investments in its stores, what is the project’s
NPV? Should the project be accepted?

2. South Tel Communications is considering the purchase of a new software management

system. The system is called B-Image, and it is expected to reduce drastically the amount of time
that company technicians spend installing new software. South Tel’s technicians currently spend
6,000 hours per year on installations, which costs South Tel $25 per hour. The owners of the B-
Image system claim that their software can reduce time on task by at least 25%. The system
requires an initial investment of $55,000 and an additional investment of $10,000 for technician
training on the new system. Annual upgrades will cost the firm $15,000 per year. The tax
treatment of software purchases sometimes calls for amortization of the initial cost over time;
sometimes the cost can be expensed in the year of the purchase. Before the tax experts are
consulted and for purposes of this initial analysis, South Tel has decided that it will expense the
cost of the software in the year of the expenditure. South Tel faces a 30% tax rate and uses a 9%
cost of capital to evaluate projects of this type.
a. Assume that South Tel has sufficient taxable income from other projects so that it can expense
the cost of the software immediately. What are the free cash flows for the project for years zero
through five?
b. Calculate the NPV and IRR for the project.