Thomson Technology and Data Tower XL854 Capital Budgeting Analysis

The assignment involves analyzing the feasibility of Thomson Technology's Data Tower XL854 project using net present value (NPV) calculations. Two scenarios are presented: one where sales revenue and operating expenses increase by 5% per year, and another where sales rise by 2% annually while operating costs increase by 4%. The analysis requires computing NPV based on free cash flow and the weighted average cost of capital to assess the project's profitability. It references studies on capital budgeting practices to support its conclusions. Ultimately, both scenarios suggest positive earnings for Thomson, indicating that accepting the project could maximize profitability.

Running head: THOMSON, TECHNOLOGY AND DATA TOWER XL854
Thomson, Technology and Data Tower XL854
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Author’s Note:
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1THOMSON, TECHNOLOGY AND DATA TOWER XL854
Table of Contents
Answer to Question 1:.....................................................................................................................2
Answer to Question 2:.....................................................................................................................2
Answer to Question 3:.....................................................................................................................3
Answer to Question 4:.....................................................................................................................3
Answer to Question 5:.....................................................................................................................4
References:......................................................................................................................................6

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Answer to Question 1:
Answer to Question 2:

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Answer to Question 3:
Answer to Question 4:

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Answer to Question 5:
In order to evaluate the feasibility of the provided project, net present value (NPV) is
used. Two scenarios are provided in this case. According to the first scenario, the sales revenue
and operating expenses are expected to increase by 5% per year. On the other hand, the second
scenario states that the sales revenue would rise by 2% per year and the operating costs would
rise by 4% each year.
In order to compute NPV, the free cash flow and weighted average cost of capital are
computed, since these are the essential requirements. In this context, Andor, Mohanty and Toth

5THOMSON, TECHNOLOGY AND DATA TOWER XL854
(2015) stated that NPV is the difference between the present value of cash inflows and present
value of cash outflows over a specific period. Thus, it is used in capital budgeting for assessing
the profitability of a projected investment or project. The NPV helps in providing direct measure
of the dollar contribution to the shareholders. However, Rossi (2015) argued that NPV method
does not help in measuring the project size, which might minimise the overall return on
investment. The higher the NPV, the better it is for the organisation. In this case, Thomson could
earn positive earnings on both scenarios, which denote that the project needs to be accepted for
maximising the profitability level.

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References:
Andor, G., Mohanty, S.K. and Toth, T., 2015. Capital budgeting practices: A survey of Central
and Eastern European firms. Emerging Markets Review, 23, pp.148-172.
Rossi, M., 2015. The use of capital budgeting techniques: an outlook from Italy. International
Journal of Management Practice, 8(1), pp.43-56.