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Vickery and Vojnovic is a business partnership set up by Robin Vickery and Kaspar Vojnovic some years ago. The partners are now considering the installation of a new computer system using specially written software to streamline the business's warehousing operations. The initial outlay on the project will be substantial. A feasibility study has already cost £20 000. Kaspar estimates that payments to the software house will be £100 000 immediately, with a further £75 000 in a year's time. New equipment and installation and testing costs will amount to £148 000 during the first year (it should be assumed for appraisal purposes that these costs arise at time 1). The plan is that the new system should go live in one year's time. After that point the business should start to reap considerable benefits from what will be, essentially, a paperless ordering and shipment tracking system. The partners plan to reduce their staffing levels considerably during the first two years during which the system is in operation and there will be other cost saving benefits including a reduction in office storage space, stationery, postage and other costs. Because of the increased efficiency of the operation, the partners also expect substantial increases in sales. The net cash inflows forecast from the installation of the new systems are as follows:

Vickery and Vojnovic is a business partnership set up by Robin Vickery and Kaspar Vojnovic some years ago. The partners are now considering the installation of a new computer system using specially written software to streamline the business's warehousing operations. The initial outlay on the project will be substantial. A feasibility study has already cost £20 000. Kaspar estimates that payments to the software house will be £100 000 immediately, with a further £75 000 in a year's time. New equipment and installation and testing costs will amount to £148 000 during the first year (it should be assumed for appraisal purposes that these costs arise at time 1). The plan is that the new system should go live in one year's time. After that point the business should start to reap considerable benefits from what will be, essentially, a paperless ordering and shipment tracking system. The partners plan to reduce their staffing levels considerably during the first two years during which the system is in operation and there will be other cost saving benefits including a reduction in office storage space, stationery, postage and other costs. Because of the increased efficiency of the operation, the partners also expect substantial increases in sales. The net cash inflows forecast from the installation of the new systems are as follows:

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Vickery and Vojnovic is a business partnership set up by Robin Vickery and Kaspar Vojnovic some years ago. The partners are now considering the installation of a new computer system using specially written software to streamline the business's warehousing operations. The initial outlay on the project will be substantial. A feasibility study has already cost £20 000. Kaspar estimates that payments to the software house will be £100 000 immediately, with a further £75 000 in a year's time. New equipment and installation and testing costs will amount to £148 000 during the first year (it should be assumed for appraisal purposes that these costs arise at time 1). The plan is that the new system should go live in one year's time. After that point the business should start to reap considerable benefits from what will be, essentially, a paperless ordering and shipment tracking system. The partners plan to reduce their staffing levels considerably during the first two years during which the system is in operation and there will be other cost saving benefits including a reduction in office storage space, stationery, postage and other costs. Because of the increased efficiency of the operation, the partners also expect substantial increases in sales. The net cash inflows forecast from the installation of the new systems are as follows: At the end of year six, the partners anticipate that the system will have to be scrapped and replaced with whatever is the latest technology at the time. There will be no residual value in the system at that point. i) ii) Time 2 3 4 5 6 The partners have asked you to appraise the project to see how quickly it will pay back. You offer to appraise the project using discounted cash flow techniques, although Robin (who did a business course a few years ago) is distinctly sceptical about this approach: 'The good thing about payback is that you can see immediately how long it's going to take to recoup the cost of the investment. Discounted cash flow doesn't make any sense to me'. However, he agrees that it might just be helpful to see what the NPV of the project is, and he estimates the business's cost of capital at 11%. Required ra rb N₂ N₂ £000 184 159 108 96 40 IRR = r₂+ calculate the payback period for the project calculate the NPV of the project using 11% as the discount rate calculate IRR NPV₁ ; (rb-ra) NPV₁-NPV = lower discount rate chosen = higher discount rate chosen = NPV at ra = NPV at rb
Transcribed Image Text:Vickery and Vojnovic is a business partnership set up by Robin Vickery and Kaspar Vojnovic some years ago. The partners are now considering the installation of a new computer system using specially written software to streamline the business's warehousing operations. The initial outlay on the project will be substantial. A feasibility study has already cost £20 000. Kaspar estimates that payments to the software house will be £100 000 immediately, with a further £75 000 in a year's time. New equipment and installation and testing costs will amount to £148 000 during the first year (it should be assumed for appraisal purposes that these costs arise at time 1). The plan is that the new system should go live in one year's time. After that point the business should start to reap considerable benefits from what will be, essentially, a paperless ordering and shipment tracking system. The partners plan to reduce their staffing levels considerably during the first two years during which the system is in operation and there will be other cost saving benefits including a reduction in office storage space, stationery, postage and other costs. Because of the increased efficiency of the operation, the partners also expect substantial increases in sales. The net cash inflows forecast from the installation of the new systems are as follows: At the end of year six, the partners anticipate that the system will have to be scrapped and replaced with whatever is the latest technology at the time. There will be no residual value in the system at that point. i) ii) Time 2 3 4 5 6 The partners have asked you to appraise the project to see how quickly it will pay back. You offer to appraise the project using discounted cash flow techniques, although Robin (who did a business course a few years ago) is distinctly sceptical about this approach: 'The good thing about payback is that you can see immediately how long it's going to take to recoup the cost of the investment. Discounted cash flow doesn't make any sense to me'. However, he agrees that it might just be helpful to see what the NPV of the project is, and he estimates the business's cost of capital at 11%. Required ra rb N₂ N₂ £000 184 159 108 96 40 IRR = r₂+ calculate the payback period for the project calculate the NPV of the project using 11% as the discount rate calculate IRR NPV₁ ; (rb-ra) NPV₁-NPV = lower discount rate chosen = higher discount rate chosen = NPV at ra = NPV at rb
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