You run a mail - order firm, selling upscale clothing. You are considering replacing your manual ordering
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Question:
You run a mailorder 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. All the cash flows given below are in real terms. The real discount
rate is
The computerized system will cost $ million to install, and $ to operate
each year. It will replace a manual order system that costs $ million to operate
each year.
The system is expected to last years, and have no salvage value at the end of the
period.
The computerized system is expected to increase annual revenues from $ million to
$ million for the next years.
The costs of goods sold is expected to remain at of revenues.
The tax rate is
As a result of the computerized system, the firm will be able to cut its inventory from
of revenues to of revenues immediately. There is no change expected in
the other working capital components.
a What is your expected cash flow at time
b What is the expected incremental annual cash flow from computerizing the
system?
c What is the net present value of this project?
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