Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

You run a mail-order firm, selling upscale clothing. You are considering replacing your manual ordering system with a computerized system, to make your operations more

You run a mail-order firm, selling upscale clothing. You are considering replacing your manual ordering system with a computerized system, to make your operations more efficient and to increase sales. (All the cash flows given below are in real terms.)

  • The computerized system will cost $10 million to instal, and $500,000 to operate each year. It will replace a manual order system that costs $1,500,000 to operate each year.
  • The system is expected to last ten years, and have no salvage value at the end of the period.
  • The computerized system is expected to increase annual revenues from $5 million to $8 million for the next ten years.
  • The costs of goods sold is expected to remain at 50% of revenues.
  • The tax rate is 40%.
  • As a result of the computerized system, the firm will be able to cut its inventory from 50% of revenues to 25% of revenuesimmediately. There is no change expected in the other working capital components.

The real discount rate is 8%.

a. What is your expected cash flow at time=0?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Management For Decision Makers

Authors: Peter Atrill

7th Edition

129201606X, 978-1292016061

More Books

Students also viewed these Finance questions

Question

1. Follow directions the first time.

Answered: 1 week ago