TLJ is considering the offering of an analytical consulting service to companies. In order to offer the service, TLJ will need to invest in a large amount of technology equipment with an estimated life of three years. The firm would need to upgrade a portion of the equipment after 3 years to continue meeting the needs of customers. The initial cost would be $200 million, while the upgrade after 3 years is projected to cost $100 million. The original equipment would be depreciated using the accelerated 5-year class for both book and tax purposes, while the upgrade would only qualify for the 3-year class. The equipment would have no salvage value at the end of the project.
The table below shows the projected demand and prices for the service given three different demand situations. Although jobs would be custom priced, for planning purposes they are separated into three groups – small, medium, and large. The table also depicts the estimated variable costs for each type of job. These prices and costs are for the first year. Management expects inflationary impact of 3% for both prices and costs throughout the project.
Pursuing this project would likely increase accounts receivable by approximately 10% of revenue. This increase would occur during the first year of the project and would increase in relationship to revenue throughout the project.
Assuming a required return of 14%, what is the NPV and IRR of this project in each economic scenario?
The firm also wants to conduct a sensitivity analysis around the expected upgrade cost. Recalculate the NPV for the average economic environment with variation of +/- 10% for the upgrade.
Management also has the option to expand the operation in year 3 if demand is strong for the project. The operation could be doubled during year 3, with the expanded operations existing during the last 3 years of the project. This would require an additional capital investment of $150 million at the end of year 3 and would include double revenue and variable expenses. Fixed costs would increase by 30%.

Calculations: Students will need to calculate the following:
• The NPV and IRR for the project in each economic scenario.
• The NPV for the average economic environment with variation of +/- 10% for the upgrade and each unit demand number.
• The NPV in the strong demand environment with the expansion.
Analyze: Analyze the above calculations and provide recommendations to management regarding the feasibility of the project. If you were the CFO, how would you proceed? Provide justification for your answer.
pricing Weak Avg Strong
small 7,500.00 8,000.00 9,000.00
medium 11,000.00 13,000.00 14,000.00
large 17,000.00 18,000.00 21,000.00

Demand Weak Avg Strong
small 10,000.00 12,000.00 13,000.00
medium 8,000.00 9,000.00 11,000.00
large 4,000.00 4,500.00 5,000.00

Var Costs Weak Avg Strong
small 4,000.00 4,500.00 5,000.00
medium 6,000.00 6,500.00 7,000.00
large 9,000.00 9,500.00 10,000.00

Fix Cost Weak Avg Strong
35,000,000.00 40,000,000.00 50,000,000.00