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Fairfield Office Supplies Inc. has a regional chain of office supply stores in the Midwest. Fairfield is trying to compete with the large nationwide office

Fairfield Office Supplies Inc. has a regional chain of office supply stores in the Midwest. Fairfield is trying to compete with the large nationwide office supply companies. It is January of 2023 and Fairfield needs to make some capital budgeting decisions this year. They need to decide whether to replace their computerized inventory system or upgrade the old one, whether to purchase two stores from a sole proprietor or not, whether to keep, abandon or modernize one of the stores, which new copiers to purchases and a few other small projects. The company is under some pressure and has a strict capital budget of $10 million, so they need to be careful as to which projects they choose.

Book Value Balance Sheet for 12/31/22

(all values in millions)

Assets

Liabilities and Net Worth

Cash and short-term securities $1.5

Bonds, coupon =9.5%, paid $15.0

Annually (maturity = 20 years,

Current yield to maturity = 9.0%)

Accounts Receivable 3.0

Preferred stock (par value $4.5 4.5

Per share)

Inventories 6.0

Common Stock (par value $.5) 1.50

Plant and equipment 35

Additional paid in stockholders 6.00

Capital

Retained Earnings 18.5

Total $45.5

Total $45.5

Years

2022

2021

2020

2019

2018

Net Income

(in millions)

5.11

4.80

4.40

4.10

3.90

3. Keep, Modernize or Abandon store

Fairfield is considering abandoning a store with no debt. Fairfield believes they could sell the store for $310,000 after taxes or it could be kept and it will produce after-tax cash flows of $95,000 for each of 5 years. In addition, the possibility of modernizing the store with additional after-tax cash flow consequences solely for the modernization are as follows:

0 1 2 3 4 5

$68,000 $10,000 $23,000 $21,000 $20,000 $16,000

Should Fairfield abandon, keep or modernize?

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