Spirit softwaer company that generated S12 million in pec- tax operating income on S 100 million...

 

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Spirit softwaer company that generated S12 million in pec- tax operating income on S 100 million in revenoes last year the form is stable ans does not expect revenue or opreating income to change over the next 10 years it is inventory mangment is in shambles and inventery as a precent of revenue amounted to 12% las year. Spirit is considering investing in anew inventory mangement system which will cost 15$ million. The inventory mangment system is expected to have 10 year life over which period it can be depecited straght line down to a salvage value of zero. The new invernory mangment system is expected to have two benefits it will immodiately reduce the inventory maintained of items that are least sold and lower the inventory/sales ratio tp 8%(and stay at thut percentage level for the life of thr inventory mangment system) By providing salcspeople with updates information on what is in stock, it is expected to increase revenues to $115 million next year(and opratingmargins to remain uncganged) The revnues and operating income from year 2 to year 10 will remain unchanged at year I levels. The redoctions inventory will also allow the copmany to sell off its existing storage facility(which has a book vaule of $5 million) today for S10 million and buy a new storeage facility for $5 millions. Both the old and the new storage facilities will be depeciated straight line over the next 10 years to a salvage value of zero. The firm has an income tax of 40% capital gains tax rate of 20% and cost of capital of 10% A)Estimate the cash flows at time 0(today) from this investment ? B) Estimate the NPV of investing in the new inventory mangment system ? Spirit softwaer company that generated S12 million in pec- tax operating income on S 100 million in revenoes last year the form is stable ans does not expect revenue or opreating income to change over the next 10 years it is inventory mangment is in shambles and inventery as a precent of revenue amounted to 12% las year. Spirit is considering investing in anew inventory mangement system which will cost 15$ million. The inventory mangment system is expected to have 10 year life over which period it can be depecited straght line down to a salvage value of zero. The new invernory mangment system is expected to have two benefits it will immodiately reduce the inventory maintained of items that are least sold and lower the inventory/sales ratio tp 8%(and stay at thut percentage level for the life of thr inventory mangment system) By providing salcspeople with updates information on what is in stock, it is expected to increase revenues to $115 million next year(and opratingmargins to remain uncganged) The revnues and operating income from year 2 to year 10 will remain unchanged at year I levels. The redoctions inventory will also allow the copmany to sell off its existing storage facility(which has a book vaule of $5 million) today for S10 million and buy a new storeage facility for $5 millions. Both the old and the new storage facilities will be depeciated straight line over the next 10 years to a salvage value of zero. The firm has an income tax of 40% capital gains tax rate of 20% and cost of capital of 10% A)Estimate the cash flows at time 0(today) from this investment ? B) Estimate the NPV of investing in the new inventory mangment system ?

Answer rating: 100% (QA)

Answer Details Amount Initial Cost of Inventory Mangement System 1500000000 Less Net cash flow from ... View the full answer