Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
16th Edition
ISBN: 9780134475585
Author: Srikant M. Datar, Madhav V. Rajan
Publisher: PEARSON
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Chapter 21, Problem 21.42P
NPV of information system, income taxes. Saina Supplies leases and sells materials, tools, and equipment and also provides add-on services such as ground maintenance and waterproofing to construction and mining sites. The company has grown rapidly over the past few years. The owner, Saina Torrance, feels that for the company to continue to scale, it needs to install a professional information system rather than relying on intuition and Excel analyses. After some research, Saina’s CFO reports back with the following data about a data warehousing and analytics system that she views as promising:
- The system will cost $750,000. For tax purposes, it can be
depreciated straight-line to a zero terminal value over a 5-year useful life. However, the CFO expects that the system will still be worth $50,000 at that time. - There is an additional $75,000 annual fee for software upgrades and technical support from the vendor.
- The ability to provide better services and to target and reach more clients as a result of the new system will directly result in a $500,000 increase in revenues for Saina in the first year after installation. Revenues will grow by 5% each year thereafter. Saina’s contribution margin is 60%.
- Due to greater efficiency in ordering and dispatching supplies, as well as in collecting receivables, the firm’s working-capital requirements will decrease by $100,000.
- Saina will also be able to reduce the amount of warehouse space it currently leases, saving $40,000 annually in the process.
- Saina Supplies pays an income tax of 30% and requires an after-tax
rate of return of 12%.
Assume that all
- 1. If Saina decides to purchase and install the new information system, what is the expected incremental after-tax cash flow from operations during each of the 5 years?
Required
- 2. Compute the
net present value of installing the information system at Saina Supplies. - 3. In addition to the analysis in requirement 2, what nonfinancial factors you would consider in making the decision about the information system?
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Saina Supplies leases and sells materials, tools, and equipment and also provides add-on services such as ground maintenance and waterproofing to construction and mining sites. The company has grown rapidly over the past few years. The owner, Saina Torrance, feels that for the company to continue to scale, it needs to install a professional information system rather than relying on intuition and Excel analyses. After some research, Saina’s CFO reports back with the following data about a data warehousing and analytics system that she views as promising:
■ The system will cost $750,000. For tax purposes, it can be depreciated straight-line to a zero terminal value over a 5-year useful life. However, the CFO expects that the system will still be worth $50,000 at that time.
■ There is an additional $75,000 annual fee for software upgrades and technical support from the vendor.
■ The ability to provide better services and to target and reach more clients as a result of the new system will…
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Chapter 21 Solutions
Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
Ch. 21 - Capital budgeting has the same focus as accrual...Ch. 21 - List and briefly describe each of the five stages...Ch. 21 - Prob. 21.3QCh. 21 - Only quantitative outcomes are relevant in capital...Ch. 21 - How can sensitivity analysis be incorporated in...Ch. 21 - Prob. 21.6QCh. 21 - Describe the accrual accounting rate-of-return...Ch. 21 - Prob. 21.8QCh. 21 - Lets be more practical. DCF is not the gospel....Ch. 21 - All overhead costs are relevant in NPV analysis....
Ch. 21 - Prob. 21.11QCh. 21 - Distinguish different categories of cash flows to...Ch. 21 - Prob. 21.13QCh. 21 - How can capital budgeting tools assist in...Ch. 21 - Distinguish the nominal rate of return from the...Ch. 21 - A company should accept for investment all...Ch. 21 - Prob. 21.17MCQCh. 21 - Which of the following statements is true if the...Ch. 21 - Prob. 21.19MCQCh. 21 - Nicks Enterprises has purchased a new machine tool...Ch. 21 - Prob. 21.21ECh. 21 - Capital budgeting methods, no income taxes. Yummy...Ch. 21 - Capital budgeting methods, no income taxes. City...Ch. 21 - Prob. 21.24ECh. 21 - Capital budgeting with uneven cash flows, no...Ch. 21 - Comparison of projects, no income taxes. (CMA,...Ch. 21 - Payback and NPV methods, no income taxes. (CMA,...Ch. 21 - DCF, accrual accounting rate of return, working...Ch. 21 - Prob. 21.29ECh. 21 - Prob. 21.30ECh. 21 - Project choice, taxes. Klein Dermatology is...Ch. 21 - Prob. 21.32ECh. 21 - Selling a plant, income taxes. (CMA, adapted) The...Ch. 21 - Prob. 21.36PCh. 21 - NPV and AARR, goal-congruence issues. Liam...Ch. 21 - Payback methods, even and uneven cash flows. Sage...Ch. 21 - Replacement of a machine, income taxes,...Ch. 21 - Recognizing cash flows for capital investment...Ch. 21 - NPV, inflation and taxes. Fancy Foods is...Ch. 21 - NPV of information system, income taxes. Saina...
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