Question

Company X is a mail-order firm that sells customized electronic equipment. Company X is considering replacing its manual ordering system with a computerized system that it believes should result in more efficient operations and increased sales. The computerized system will cost $10 million, has an expected 10-year useful life, and has an estimated salvage value of $250,000. The class will remain open after the project ends, and after the disposal, there is still a positive balance for the UCC. The annual operating expenses with the new system are estimated to be $250,000, compared to the annual costs of $750,000 with the manual system. Management believes annual net sales will increase from $5 million to $8 million, and cost of goods sold (COGS) will remain at 55% of revenues. Management also believes that inventories can be reduced by $450,000 with the new system.

The tax rate is 24%, its cost of capital is 11%, and the CCA on the computerized system is 25%. The equipment qualifies for the Accelerated Investment Incentive, so 1.5 times the CCA can be claimed in the year of acquisition. What is the net present value (NPV) for the proposal?

a) –$5,647,954

b) $102,881

c) $394,399

d) $7,779,495

Answer 1

Solution:

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