In: Finance
Maverick Company generated $ 14 million in pre-tax operating income on $ 100 million in revenues last year; the firm is stable and does not expect revenues or operating income to change over the next 10 years. Its eCommerce management is in shambles and eCommerce as a percent of revenues amounted to 10% last year. Maverick considering investing in a new eCommerce management system, which will cost $ 17 million. The eCommerce management system is expected to have a 10- year life, over which period it can be depreciated straight line down to a salvage value of zero. The new eCommerce management system benefits the company by providing management with updated sales information; it is expected to increase revenues to $ 117 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.
A.) Calculate the cash flows at time 0 (today) from this investment. B.) Calculate the NPV of investing in the new eCommerce management system. C.) Calculate IRR of the new eCommerce management system.
With new system | |||||||||||
Revenue | 117.00 | ||||||||||
Operating margin | 14.00% | ||||||||||
Pre tax operating income | 16.38 | ||||||||||
Incremental cash flow at yr 0 | 2.38 | ||||||||||
So incremental cash flows | |||||||||||
Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
Pre tax operating income | 2.38 | 2.38 | 2.38 | 2.38 | 2.38 | 2.38 | 2.38 | 2.38 | 2.38 | 2.38 | |
Less: initial capex | 17.00 | ||||||||||
Net cash flow | -17.00 | 2.38 | 2.38 | 2.38 | 2.38 | 2.38 | 2.38 | 2.38 | 2.38 | 2.38 | 2.38 |
IRR | 6.64% | ||||||||||
NPV at various discount rates | |||||||||||
Rate | NPV | ||||||||||
5% | 1.38 | ||||||||||
7% | -0.28 | ||||||||||
10% | -2.38 | ||||||||||
12% | -3.55 | ||||||||||