Reference no: EM132688527

IT Software Project As a senior analyst for the company you have been asked to evaluate a new IT software project. The company has just paid a consulting firm $100,000 for a test marketing analysis. After looking at the project plan, you anticipate that the project will need to acquire computer hardware for a cost of $450,000. The Australian Taxation Of?ce rules allow an effective life for the computer hardware of five years.

• The equipment can be depreciated on a straight-line (prime cost) basis and there is no expected salvage value after the ?ve years. Your company does not have any available space where the project can be located for five years and you anticipate to rent the required office space it would cost $65,000 per year for the life of the project. You expect that the project will need to hire 3 new software specialists at $50,000 {each specialist) per year (start in year 1) for the full five years to work on the software. The project will use a van currently DWHed by the company.
•  Although the van is not currently being used by the company, it can be rented out for $15,000 per year for ?ve years. The book value of the van is $20,000. The van is being depreciated straight-line (with five years remaining for depreciation) and is expected to be worthless after the five years. Expected annual marketing and selling costs will be incurred during the life of the project {5 years}, with the ?rst year expecting to be $250,000.
• The produced software is expected to sell at $85 per unit while the cost to produce each unit is $40. You expect that 10,000 units will be sold in the ?rst year and the number of units sold will increase by 25% a year for the remaining four years. The project will need working capital of $50 000 to commence the business [in year 0) and the investment in working capital is to be completely recovered by the end of the project's life (in year 5). The company tax rate is 30%, and the discount rate is 10. 5%.

Question 1: In evaluating the new IT software project, is the cost of $100,000 spent on marketing analysis relevant? Explain your answerls

Question 2: Calculate the incremental free cash ?ow during the project's life (starting from year0 to year 5).

Question 3: Calculate the NPV, payback period and lth of the project. Should the project be accepted? Show workings and explain your answer.