A retail company is considering investing in a new IT system for online sales. This would involve investing £10 million in servers and computer software that would have an expected useful life of 3 years. The disposal value of the servers is expected to be £2 million at the end of the 3rd year. It is estimated that the online sales could generate additional revenues of £4 million per year. At the same time, the new system would require hiring software engineers for maintenance at an annual cost of £400,000. The new online sales unit would be allocated corporate overhead costs of £500,000 per year. The investment in the online sales system requires closing a third of all current stores. These had been fitted with new fixtures 2 years ago at a total cost of £1 million with an expected useful life of 5 years. The fixtures' estimated disposal value at the end of the 5th year is £100,000 and their current market value is £250,000. The closing of the stores involves laying off staff with a total salary cost of £700,000 per year, that then would be saved. Assume that the tax rate is 30%. What is the NPV?

Answer rating: 100% (QA)

To calculate the net present value NPV of the investment in the new IT system for online sales we need to consider the cash inflows and outflows assoc... View the full answer