Question

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? a) –$5,237,984 b) –$759,223 c) –$467,706 d) $5,362,634

Answer 1