Question
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?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started