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Imagine you are a representative of management in the company you have selected for your Week...

Imagine you are a representative of management in the company you have selected for your Week 6 Assignment and you must make a capital budgeting decision. The decision is to implement a new computer network system to decrease the time between customer order and delivery. The cost will be 10% of last year’s profits. You are charged with describing the important considerations in the decision-making process to upper management.

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Answer #1

Cost of the computer network system = 10% of last year profits.
Expected Benefits of the computer system = Decrease in time between customer order and delivery

To make the capital budgeting decision we need to consider the following points

  1. Estimated increase in the number of orders and revenues because of the increased capacity to process orders
    Now the company has freed up time to process more number of orders in the given time period.
  2. Reduction in Labour costs other costs per year due to reduction in order to delivery time - this could be because of increased productivity, lesser labour requirement etc.
  3. Over what period of time are the benefits to be expected - 1/2/3 or more years?
  4. Estimate the increased revenue & profits per year because of implementation of the computer system
  5. Discount Rate to be used for capital budgeting
  6. Cost of any additional debt that needs to be taken up to pay for the new computer system
  7. Applicable tax rate
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