Company X is considering replacing an old inventory management system with an automated system which costs $ 250,000. This system will be fully depreciated over 4 years, the liquidation price expected at the end of year 4 is $ 2500. If installed this system will save $ 60,000 (before tax) inventory management costs. Corporate income tax is 20%. Because of its automated inventory management system, it will make a decrease of $ 50,000 in company X's investment in current assets. Should the company X replace the old system? Note that: The old system has the residual value of $ 90,000, the net market price is $ 75,000. If the company buys the new system, it will sell the old system. If still in use, the old system will be fully depreciated for the remaining 4 years. The liquidation price of the old system at the end of the year 4 is $800. The discount rate of the company is 12%.

a) Calculate the NPV of the project, ignoring inflation.

b) Calculate the NPV of the project, at a cost of capital of 12%, taking the following inflationary increases in revenues and costs into consideration: Because of inflation, inventory management costs saved (before tax) will rise by 3% in each year.

c)Critically evaluate the differences in your results, compared with the NPV you calculated in part.