Polar Express Railroad keeps a $5 million inventory of spare parts on hand for repairing unexpected breakdowns and equipment failures. The inventory is held in one centralized warehouse at a storage cost of $330000 per year. The inventory has been financed by a short-term bank loan at 6.5% interest.

The Operations manager has proposed moving the parts from the centralized warehouse to ten storage locations at hubs of the Polar Express network. The required total inventory would increase to $7 million because some parts would have to be held in inventory at all 10 locations. Storage cost would increase to $600000 per year. But having the parts at the hubs would save $400000 per year in labor cost of repairs. Also repairs would be completed quicker, improving customer service.

Evaluate the operation manager's proposal. Assume the opportunity cost of capital is the interest rate on the bank loan.

7. Inventory Polar Express Railroad keeps a $5 million inventory of spare parts on hand for repairing unexpected breakdowns and equipment failures. The inventory is held in one cen- tralized warehouse at a storage cost of $330,000 per year. The inventory has been financed by a short-term bank loan at 6.5% interest. The operations manager has proposed moving the parts from the centralized warehouse to ten storage locations at the hubs of the Polar Express network. The required total inventory would increase to $7 million because some parts would have to be held in inventory at all 10 locations. Storage costs would increase to $600,000 per year. But having the parts at the hubs would save $400,000 per year in the labor cost of repairs. Also repairs would be completed quicker, improving customer service. 7. Inventory Polar Express Railroad keeps a $5 million inventory of spare parts on hand for repairing unexpected breakdowns and equipment failures. The inventory is held in one cen- tralized warehouse at a storage cost of $330,000 per year. The inventory has been financed by a short-term bank loan at 6.5% interest. The operations manager has proposed moving the parts from the centralized warehouse to ten storage locations at the hubs of the Polar Express network. The required total inventory would increase to $7 million because some parts would have to be held in inventory at all 10 locations. Storage costs would increase to $600,000 per year. But having the parts at the hubs would save $400,000 per year in the labor cost of repairs. Also repairs would be completed quicker, improving customer service