Maverick Company generated $ 14 million in pre-tax operating income on $ 100 million in revenues...

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.

Expert Solution


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

jeff jeffy answered 6 months ago

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