Ura Comp, a computer software company, generates Br 12 million in pre-tax operating incomeon Br 100 million in revenues last year. The firm is stable and does not expect revenues oroperating income to change over the next 5 years. However, its inventory management is in amess and inventory as a percent of revenues amounted to 12% last year. Ura is consideringinvesting in a new inventory management system, which will cost Br 15 million. The inventorymanagement system is expected to have a 5- year life, over which period it can be depreciatedstraight line with zero salvage value. The new inventory management system is expected to havemany benefits: it will immediately reduce the inventory maintained of items that are least sold;and lower the inventory/sales ratio to 8% (and stay at that percentage level for the life of theinventory managementsystem)

By providing salespeople with updated information on what is in stock, it is expected to increaserevenuestoBr115millionnextyear(andoperatingmarginstoremainunchanged).Therevenuesandoperatingincomefromyear2 toyear5 willremainunchangedatyear 1 levels.

Thereductionininventorywillalsoallowthecompanytoselloffitsexistingstoragefacility(whichhas a book value of Br 5 million) today for Br 10 million and buy a new storage facility for Br 5million.Thenewstoragefacilitieswillbedepreciatedstraightlineoverthenext5yearstoasalvagevalueof zero. TheCompanyhastax rateof 40%,andacostof capitalof10%.

1. Estimatethecashflows
2. EstimatetheNPVofinvestinginthenewinventorymanagementsystem.
3. Giveyour opinionon theinvestmentproposal