A sales representative for Monster Computer Corporation was working with the head of data processing of a major account to develop a financial justification for the company to purchase $9 million of computer and storage hardware and other peripherals, which would replace an existing data processing installation. The potential customer had estimated the savings to be achieved by the new equipment. Working with this estimate and financial information about the client company, the sales representative must undertake a rigorous capital budgeting analysis to help the potential customer sell the project to the financial people in the company. The case provides students with an opportunity to analyze a simple capital expenditure. They are required to develop a discount rate, based upon costs of funds, and to utilize that discount rate to value the cash flows expected. Information is provided about the likelihood of receiving the expected cash flows, so that expected NPV and IRR values may be determined. There is ample room for discussion about the costs of debt and equity to use the weights to be applied. Additionally, the affect of expected inflation must be factored into the analysis.
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