Spirit software company that generated $12 million in pec-tax operating income on $ 100 million in revenues last year the form is stable an does not expect revenue or operating income to change over the next 10 years it is inventory management is in shambles and inventory as a percent of revenue amounted to 12% last year. Spirit is considering investing in anew inventory management system which will cost 15$ million. The inventory management system is expected to have 10 year life over which period it can be deprecated straight line down to a salvage value of zero. The new inventory management system is expected to have two benefits it will immediately reduce the inventory maintained of items that are least sold and lower the inventory/sales ratio tp 8%(and stay at that percentage level for the life of the inventory management system)
By providing salcs people with updates information on what is in stock, it is expected to increase revenues to $115 million next year(and operating margins to remain unchanged)
The revenues and operating income from year 2 to year 10 will remain unchanged at year 1 levels.
The reductions inventory will also allow the company to sell off its existing storage facility (which has a book value of $5 million) today for $10 million and buy a new storage facility for $5 millions. Both the old and the new storage facilities will be depreciated straight line over the next 10 years to a salvage value of zero.
The firm has an income tax of 40% capital gains tax rate of 20% and cost of capital of 10%
A) Estimate the cash flows at time 0(today) from this investment?
B) Estimate the NPV of investing in the new inventory management system?