Question
You own a retail business and generated $ 40 million in EBITDA on revenues of $ 200 million in the most recent year. You are
You own a retail business and generated $ 40 million in EBITDA on revenues of $ 200 million in the most recent year. You are considering spending $ 20 million in a new computerized inventory system; the investment is depreciable straight line over 5 years to a salvage value of zero. If you install the system, you expect to see two primary benefits: Your revenues which had been expected to be flat ($200 million each year) for the next 5 years will grow 8% each year for the next 5 years with the new system in place ($216 million next year, $ $233.3 million in year 2 etc) Your EBITDA margin (as a percent of revenues) will remain unchanged at current levels for the next 5 years but you do expect your non-cash working capital which is currently 10% of revenues to drop to 5% of revenues immediately and remain at that percent level each year for the next 5 years. At the end of year 5, you expect to scrap the new inventory system and get no salvage value for the system. The working capital is expected to revert back to 10% of revenues at the point in time. Your marginal tax rate is 35% and your cost of capital is 12%. Question: Estimate the NPV of the investment.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started