Question
our firm is considering the purchase of a new inventory management system, which is anticipated to cost $1,150,000. The system will be depreciated using the
our firm is considering the purchase of a new inventory management system, which is anticipated to cost $1,150,000. The system will be depreciated using the five year MACRS depreciation method (see the appendix). It is anticipated that the system will have a salvage value of $125,000 at the end of that time. You are expected to reduce inventory handling costs by $410,000 before taxes each year, and you will reduce working capital by $133,000 (one-time reduction) due to the increased inventory efficiencies. Assuming a marginal tax rate of 40% and a discount rate (risk-adjusted cost of capital) of 16%, should you purchase the new system? Assume that changes in working capital at the beginning of the project will reverse at the time of sale. Be sure to calculate the NPV, IRR, MIRR, payback, discounted payback, and BCR.
Appendix
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