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Norris is a manufacturer of electronic devices. Sales have recently been lost because of the inability to store sufficient finished goods inventory, even though Norris

Norris is a manufacturer of electronic devices. Sales have recently been lost because of the
inability to store sufficient finished goods inventory, even though Norris has the capability of
increasing production. The solution under discussion is to increase production to create a larger
finished good inventory so that lost sales will not occur in the future. To increase the inventory,
Norris estimates the following will be required:
i. The finished goods inventory needs to be expanded by $150,000.
ii. Existing vacant warehouse space is available for storing the additional inventory.
However, new equipment costing $80,000 with a 5-year economic life is required.
Straight-line depreciation will be employed, and Norriss marginal tax rate is 40%. Running
the warehouse will incur additional wages of $40,000 per year.
iii. The sales and production people estimate that the increased sales will result in a net cash
inflow to the firm (after all production costs, but before considering the additional
warehouse expense and taxes) of $100,000 per year.
iv. In 5 years, the equipment will have a resale value of zero. The $150,000 buildup in
inventory is no longer required.

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