You run a mail-order firm, selling upscale clothing. You are considering replacing your manual order

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You run a mail-order firm, selling upscale clothing. You are considering replacing your manual ordering system with a computerized system, to make your operations more efficient and to increase sales. (All the cash flows given below are in real terms.)

  • The computerized system will cost $10 million to instal, and $500,000 to operate each year. It will replace a manual order system that costs $1,500,000 to operate each year.
  • The system is expected to last ten years, and have no salvage value at the end of the period.
  • The computerized system is expected to increase annual revenues from $5 million to $8 million for the next ten years.
  • The costs of goods sold is expected to remain at 50% of revenues.
  • The tax rate is 40%.
  • As a result of the computerized system, the firm will be able to cut its inventory from 50% of revenues to 25% of revenues immediately. There is no change expected in the other working capital components.

The real discount rate is 8%.

    a. What is your expected cash flow at time=0? (1 point)

    b. What is the expected incremental annual cash flow from computerizing the system? (3 points)

    c. What is the net present value of this project? (1 point

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