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?

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 4P: Although the Chen Company’s milling machine is old, it is still in relatively good working order and...

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Although the Chen Company’s milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $110,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $19,000 per year. It would have zero salvage value at the end of its life. The project cost of capital is 10%, and its marginal tax rate is 25%. Should Chen buy the new machine?
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