Johnson Limited is contemplating the installation of a new system that would allow for automated handling of customer inquiries about their order status, account balances, etc. Currently all such inquiries are handled manually by customer service representatives. The software for the new system would cost $230,000. An additional $155,000 would be required for one-time installation costs. Management estimates that the new system would result in costs of $11,900 per year related to addressing software issues and other technological problems that may arise. However, the new system is expected to reduce labour costs by $72,000 per year.

Management estimates that the system would be used for five years. Severance costs related to the employees that would be laid off after implementing the new system would be $20,200. Johnson Limited requires a return of at least 13% on investments of this type.

Required:

Ignore income taxes.

1. Compute the net annual cost savings promised by the new system.

2-a. Using the data from requirement 1 above and other data from the problem, compute the new systems net present value. (Use the incremental-cost approach.) (Hint: Use Microsoft Excel to calculate the discount factor(s).) (Do not round intermediate calculations and PV factor. Round the final answers to the nearest whole dollar. Negative amount should be indicated by a minus sign.)

2-b. Would you recommend that the system be implemented?

• No

• Yes

3. Assume that there are intangible benefits associated with the new system related to having more satisfied customers. For example, shorter wait times for automated responses would increase the likelihood that customers will buy products from Johnson Limited again in the future. What dollar value per year would management have to attach to these intangible benefits in order to make the new system an acceptable investment? (Hint: Use Microsoft Excel to calculate the discount factor(s).) (Do not round intermediate calculations and PV factor. Round the final answers to the nearest whole dollar.)

Net annual cost savings Net present value Intangible benefits per year