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Cargo Specialists is a leading producer of logistics and transportation systems. The company is currently evaluating a new contemporary equipment of production logistics systems, which

Cargo Specialists is a leading producer of logistics and transportation systems. The company is currently evaluating a new contemporary equipment of production logistics systems, which facilitates firms activities and organizes more efficiently the activities time spent. Production facilities for the new production logistic equipment would be set up in an unused section of the companys main plant. Relatively inexpensive, used equipment with an estimated cost of only 440,000 would be purchased, but shipping costs to move the equipment to Cargo Specialists plant would total 25,000, and installation charges would add another 30,000 to the total equipment cost; shipping and installation costs will be involved in the overall equipment costs and will be depreciated alongside. Further, Cargo Specialists inventories (raw materials, work-in-process, and finished goods) would have to be increased by 15,000 at the time of the initial investment. The equipment has a remaining economic life of 4 years, and the company has obtained a special tax ruling that allows it to apply accelerated depreciation rates, as follows: 0.5,0.4,0.3 and 0.2 in Years 1 through 4, respectively. The equipment will have been fully depreciated after 4 years of use, but the management expects to sell it at a price of 70,000. The section of the main plant where the new production logistic would occur has been unused for several years, and consequently it has suffered some deterioration. Last year, as part of a routine facilities improvement program, Cargo Specialists spent 160,000 to rehabilitate that section of the plant. Cargo Specialists management expects to sell 120,000 logistics software in each of the next 4 years, at price of 12.00 per item, of which 9.50 per item would be needed to cover fixed and variable cash operating costs. In examining the sales figures, the management expects that the new project would cut into the firms sales of regular (old) logistic system this type of effect is called cannibalization. Specifically, the sales manager estimated that regular logistics system sales would fall by 150,000 if the new system was introduced. However, this fall in production of the regular system would also lead to a respective fall in operating expenses by 70,000. Cargo Specialists cost of capital is 13%, and the companys tax rate is 21%. Assume that Cargo Specialists will be a profitable company in the next 4 years. Assume that tax authorities had not allowed the special tax ruling that allowed the company to apply accelerated depreciation rates, and the company would have to use the straight-line depreciation method. Discuss and show how this would affect the NPV and the IRR of the investment project (assuming all other parameters of the project remain unchanged).

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