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Judy, the new marketing manager forAble2Wear (AW), a retailer of adaptive clothing for individuals with reduced mobility, recently proposed to the board that the company

Judy, the new marketing manager forAble2Wear (AW), a retailer of adaptive clothing for individuals with reduced mobility, recently proposed to the board that the company create a new website to allow customers to purchase products on the website rather than just through a catalogue and call centre. The call centre would still be available to take orders. The costs to design the website are initially $750,000. These costs are fully deductible for income tax purposes in the year incurred. Ongoing website maintenance would be $30,000 annually. Judy estimated that the number of call centre employees, each of whom is paid $35,000 annually, could be reduced by six. In addition, Judy believes that sales would increase by 10% with no change in cost of goods sold. Currently, AW has a contribution margin of $2,100,000 annually, pays taxes at 25%, and has a policy stating that all IT projects must pay back in two years.

After Judy reviews this proposal with you, the senior financial analyst, you identify that this is a new service offering for AW and the customers have not yet been surveyed to see their interest, creating greater uncertainty in the estimate provided. In your experience with AW, the customers have not been quick to adopt new services. You are working on your new analysis and plan to provide Judy a copy of the following table to help explain how you reassessed the proposal:

Probability

% Increase in Sales

.30

5%

.40

10%

.30

12%

Required:

  1. In Excel, calculate the payback period of the initial proposed investment that Judy prepared and recommend ifAWshould invest in the new website?

  1. In Excel, calculate the payback period using the new information you are going to provide to Judy and recommend if AW should still invest in the new website?

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