Question

Calculate had a net income of 5 million dollars in 2010, while a small competing company, Computate, had a

Answer 1

9514 1404 393

Answer:

  a) see the attached spreadsheet (table)

  b) Calculate, for a 10-year horizon; Computate for a longer horizon.

  c) Year 13; no

Step-by-step explanation:

a) The attached table shows net income projections for the two companies. Calculate's increases by 0.5 million each year; Computate's increases by 15% each year. The result is rounded to the nearest dollar.

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b) After year 4, Computate's net income is increasing by more than 0.5 million per year, so its growth is faster and getting faster yet. However, in the first 10 years, Calculate's net income remains higher than that of Computate. If we presume that some percentage of net income is returned to investors, then Calculate may provide a better return on investment.

The scenario given here is only interested in the first 10 years. However, beyond that time frame (see part C), we find that Computate's income growth far exceeds that of Calculate.

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c) Extending the table through year 13, we see that Computate's net income exceeds Calculate's in that year. It continues to remain higher as long as the model remains valid.