You have been assigned to check the valuation of InfoSystems, a software firm, done by acolleague of you. Infosystems has an expected life 5 years, constant cash flows over thisperiod, and zero salvage value. The income statement of the Infosystems is given as follows: Years 1-5Revenues€1000 -Operating expenses€550EBIT€450 - Interest expesnes€85Taxable income€365 - Taxes€146Net income€219Infosystems has no capital expenditures, depreciation or working capital needs, i.e. theearnings are the cash flows to the firm. The cost of capital is 10%i. Estimate the value of Infosystems.ii. Assume that the value derived in (i) is the one also estimated by your colleague. Howwould you change your calculations if you are given that the cash flows are real cashflows and the cost of capital is the nominal cost of capital. The expected inflation rateis 2% annually. Comment on your answer. You have been assigned to check the valuation of InfoSystems, a software firm, done by acolleague of you. Infosystems has an expected life 5 years, constant cash flows over thisperiod, and zero salvage value. The income statement of the Infosystems is given as follows:Revenues-Operating ExpensesEBIT-Interest expensesTaxable income- TaxesNet IncomeYears 1-5€1,000€550€450€85€365€146€219Infosystems has no capital expenditures, depreciation or working capital needs, i.e. theearnings are the cash flows to the firm. The cost of capital is 10%1. Estimate the value of Infosystems.Assume that the value derived in () is the one also estimated by your colleague. Howwould you change your calculations if you are given that the cash flows are real cashflows and the cost of capital is the nominal cost of capital. The expected inflation rateis 2% annually. Comment on your answer.

1. Real cash flows should be discounted using real cost of capital. 2. nominal cash flows should be…

Answered: You have been assigned to check the…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 2CE

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Question

You have been assigned to check the valuation of InfoSystems, a software firm, done by a
colleague of you. Infosystems has an expected life 5 years, constant cash flows over this
period, and zero salvage value. The income statement of the Infosystems is given as follows:

	Years 1-5
Revenues	€1000
-Operating expenses	€550
EBIT	€450
- Interest expesnes	€85
Taxable income	€365
- Taxes	€146
Net income	€219

Infosystems has no capital expenditures, depreciation or working capital needs, i.e. the
earnings are the cash flows to the firm. The cost of capital is 10%
i. Estimate the value of Infosystems.
ii. Assume that the value derived in (i) is the one also estimated by your colleague. How
would you change your calculations if you are given that the cash flows are real cash
flows and the cost of capital is the nominal cost of capital. The expected inflation rate
is 2% annually. Comment on your answer.