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
Other Projects
There are a few other projects Fairfield is looking at:
Purchase parcels of land to put future stores on: $4.8 million that is expected to be worth $12.6 million in 10 years.
Purchase of New business line: Cost= $3.1 million, Net after tax cash flow for the next 5 years = 1.2 million and the Business is expected to net $1.2 million when sold after 5 years.
Purchase of a supplier: Cost $2.9 million, Net after-tax cash flow for the next 6 years = $.6 million, this includes the benefits of the lower cost of goods, and the business is expected to net $3.9 million when sold after 6 years.
Decision time.
Which projects would you suggest Fairfield act upon if no capital rationing and what is the optimal capital budget AND taking into consideration the $10 million capital rationing which projects would suggest Fairfield act upon?
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