Judy Ericsdotter, the new marketing manager for Adaptive Wear (AW), a retailer of adaptive clothing for individuals with reduced mobility, recently proposed to the board that the company create a new website to allow customers to purchase products on the website rather than just through a catalogue and call centre. The call centre would still be available to take orders. The costs to design the website are initially $750,000. These costs are fully deductible for income tax purposes in the year incurred. Ongoing website maintenance would be $30,000 annually. Judy estimated that the number of call centre employees, each of whom is paid $35,000 annually, could be reduced by six. In addition, Elaine believes that sales would increase by 10% with no change in cost of goods sold. Currently, AW has a contribution margin of $2,100,000 annually, pays taxes at 25%, and has a policy stating that all IT projects must pay back in two years.

Required:

Using the payback method, should AW invest in the new website?

Answer rating: 100% (QA)

Payback method uses the following formula Payback period Initial Invesment Cash flow per year In the ... View the full answer