GetItNow Inc. is considering investing in a new project that would use drones to deliver products on very short notice. They have just concluded a one-year study, at a cost of $1 million, to assess the feasibility of the technology and the market-readiness for this premium service. The project is expected to generate revenues of $50 million per year over the next 4 years (starting in Year 1).

The type of drones that are required are quite sophisticated and require a large amount of customization to accommodate the heavy payload and durability requirements. Because of these custom requirements, the drones themselves must be manufactured in one production run and so all the drones will be purchased immediately at a total cost of $24 million. They are expected to have a 4-year life with no resale value at the end of their lives. This capital investment can be depreciated straight line, over 4 years, starting in Year 1.

GetItNow is already a successful delivery service with an in-house inventory management, scheduling and tracking system that can easily accommodate the drone project without impacting current business. Thus, they do not foresee any additional expenditures on this system. The system is state of the art and new. It was purchased in the last year for $10 million and costs $1 million a year to maintain.

As part of renewing their license to operate within California, GetItNow is required to conduct periodic environmental impact studies. Their current license expires in 4 years, but to get regulatory permission to launch the drone service now, GetItNow agreed to conduct the next environmental review early so the additional impact of the drone service can be assessed. (Conducting the next review early will not impact the timing for future reviews.) Consequently the next environmental review will take place the year after the drone service is introduced. That is, if the project is undertaken, the next review will take place in Year 2 instead of Year 4. The review costs $2 million to complete, treated as an operating expense.

The costs associated with operating the drones are expected to be 40% of revenues. In addition, executives believe that a specialized sales force and advertising campaign would be needed to sell the service. The cost of the sales team and marketing will be $4 million per year.

As a delivery service business, inventory requirements are zero. Because most customers pay at the time of delivery, accounts receivable will average only 2% of annual sales. Accounts payable are expected to average 10% of annual operating and sales costs. The company expects these accounts will be fully paid for one year after the conclusion of the project. The corporate tax rate is 20%.