As your final assignment as an intern, you are tasked with deciding if the company

should upgrade its current computerized inventory system. The remaining period of the lease of this

factory space is 7 years and management has no intention of renewing the lease. The required return

is 9% and the tax rate is 18%. The expected life and incremental cash flows for the two models of

computerized inventory systems are as follows:

Current Computerized Inventory System:

Initial cost outlay: $1.5 million

Annual depreciation: $150,000

Accumulated depreciation: $900,000

Remaining useful life: 7 years

Annual operating costs (excluding depreciation): $550,000

Current Salvage Value: $500,000

Estimated salvage value at year 7: $60,000

New Computerized Inventory System:

Initial cost outlay: $2.1 million

Useful life: 7 years

Annual depreciation: Straight-line full depreciation

Annual operating costs (excluding depreciation): $225,000

Estimated salvage value at year 7: $100,000

a) What is the initial cash outlay associated with this replacement project?

b) What are the operating cash flows associated with this project for years 1 through 7?

c) What is the terminal cash flow in year 7?

d) What is the projects NPV? Would you replace the current inventory system with the new one?