You run a mail-order firm, selling upscale clothing. You are considering replacing your manual ordering system with a computerized system to make your operations more efficient and to increase sales. • The computerized system will cost $ 10 million to install and =$ 500,000 to operate each year. It will replace a manual order system that costs $ 1.5 million to operate each year. • The system is expected to last 10 years and will have no salvage value at the end of the period • The computerized system is expected to increase annual revenues from $5 million to $ 8 million for the next 10 years • The cost of goods sold is expected to remain at 50% of revenues • The tax rate is 40% • As a result of the computerized system, the firm will be able to cut its inventory from 50% of revues to 25% of revues immediately. There is no change expected in the other working capital components. The cost of capital is 8%. a. What is your expected cash flow today? b. what are the expected incremental annual cash flows form computerizing the system? c. What is the time-weighted cash flows on this investment?
You run a mail-order firm, selling upscale clothing. You are considering replacing your manual ordering system with a computerized system to make your operations more efficient and to increase sales. • The computerized system will cost $ 10 million to install and =$ 500,000 to operate each year. It will replace a manual order system that costs $ 1.5 million to operate each year. • The system is expected to last 10 years and will have no salvage value at the end of the period • The computerized system is expected to increase annual revenues from $5 million to $ 8 million for the next 10 years • The cost of goods sold is expected to remain at 50% of revenues • The tax rate is 40% • As a result of the computerized system, the firm will be able to cut its inventory from 50% of revues to 25% of revues immediately. There is no change expected in the other working capital components. The cost of capital is 8%. a. What is your expected cash flow today? b. what are the expected incremental annual cash flows form computerizing the system? c. What is the time-weighted cash flows on this investment?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:You run a mail-order firm, selling upscale clothing. You are considering replacing your manual ordering system with a computerized system to make your operations more efficient and to increase sales.
• The computerized system will cost $ 10 million to install and =$ 500,000 to operate each year. It will replace a manual order system that costs $ 1.5 million to operate each year.
• The system is expected to last 10 years and will have no salvage value at the end of the period
• The computerized system is expected to increase annual revenues from $5 million to $ 8 million for the next 10 years
• The cost of goods sold is expected to remain at 50% of revenues
• The tax rate is 40%
• As a result of the computerized system, the firm will be able to cut its inventory from 50% of revues to 25% of revues immediately. There is no change expected in the other working capital components.
The cost of capital is 8%.
a. What is your expected cash flow today?
b. what are the expected incremental annual cash flows form computerizing the system?
c. What is the time-weighted cash flows on this investment?
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