Buy Direct Electronics (BDE) is a mail-order firm that sells customized electronic equipment. BDE 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 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 but that 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. If BDE’s tax rate is 40%, its cost of capital is 11% and the CCA on the computerized system is 25%, what is the net present value (NPV) for the proposal? The answer options are a) –$5,237,984 b) –$759,223 c) –$467,706 d) $5,362,634

Name: Techwhiff
Address: 1520 Lavalette Ave, Elkins, WV 26241, USA, Elkins, 26241, US
Telephone: +1 681-298-8325
Price range: 10000

Outlay cost on proposal (C) =$1000000 time period t = 10 yrs. Salvage value (S) at the 10 yrs end =$250000 annual operating costs (Depreciation) =$250000 annual net sales (cash inflow)=$8000000 cost of goods sold =55% of $8000000=$4400000 benefits out of inventory reduction =$450000 tax =40% discount rate=11% CCA on new system =25%*$1000000=$250000 Annuity factor from the present value tables for 11% and 10 yrs period =0.3522 Cash outlay every year =$250000+$4400000-$450000 +$250000=$4450000 cash inflow every year=$8000000 net cash flow every year =$8000000-$4450000=$3550000 After tax net cash flow every year =$2130000 Now NPV =($2130000*Annuity factor-cost of outlay on proposal($1000000) = 750152.94-$1000000 = ($249,847) .

Buy Direct Electronics (BDE) is a mail-order firm tha…

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Outlay cost on proposal (C) =$1000000
time period t = 10 yrs.
Salvage value (S) at the 10 yrs end =$250000
annual operating costs (Depreciation) =$250000
annual net sales (cash inflow)=$8000000
cost of goods sold =55% of $8000000=$4400000
benefits out of inventory reduction =$450000
tax =40%
discount rate=11%
CCA on new system =25%*$1000000=$250000

Annuity factor from the present value tables for 11% and 10 yrs period =0.3522

Cash outlay every year =$250000+$4400000-$450000 +$250000=$4450000

cash inflow every year=$8000000

net cash flow every year =$8000000-$4450000=$3550000

After tax net cash flow every year =$2130000

Now NPV =($2130000*Annuity factor-cost of outlay on proposal($1000000)

=	750152.94-$1000000
=	($249,847)

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