The financial manager of the Villard Electric Company, Fred Taylor, has presented his estimates of cash flows resulting from the possible investment in a new computer system, the Webnet. Mr. Taylor’s estimates of net cash flows immediately and over the following four years are as follows:

 

 

â–  The cost of the system (including installation) is $200,000.

 

â–  The system will be depreciated as a 5-year asset under the MACRS, but it will be sold at the end of the fourth year for $50,000.

 

■ Villard’s expenses will decline by $50,000 in each of the four years.

 

■ The company’s tax rate will be 36%.

 

■ Working capital will not be affected. When he made his presentation to Villard’s board of directors, Mr. Taylor was asked to perform additional analyses to consider the following uncertainties:

 

â–  The cost of the system may be as much as 20% higher or as low as 20% lower.

 

â–  The change in expenses may be 30% higher or 20% lower than anticipated.

 

â–  The tax rate may be lowered to 30%.

 

a. Reestimate the project’s cash flows to consider each of the possible variations in the assumptions, altering only one assumption each time. Using a spreadsheet program will help with the calculations.

 

b. Discuss the impact that each of the changes in assumptions has on the project’s cash flows.