Question
In: Economics
A major drug store chain plans to spend $35 million in capital investments for its new...
A major drug store chain plans to spend $35 million in capital
investments for its new inventory loss reduction initiative. By
upgrading the current inventory tracking system using advanced RFID
technology, the company estimates the annual maintenance cost of
$210,000. The salvage value of the system at the end of year 13 is
expected to be 0.4% of the original investment. Drugstore chain
wants to know the minimum annual inventory loss prevention required
to make this investment economically acceptable and the net annual
worth of this investment. , if the company's minimum attractive
rate of return is 8% per year.
Solutions
Expert Solution
Solution :-
Original investment = $35 million
The company estimates the annual maintenance cost of = $210,000.
The salvage value of the system at the end of year 13 is expected to be 0.4% of the original investment
= 0.4% x 35000000
= 0.004 x 35000000
= 140,000
So, The salvage value = $140,000
Life = 13 years.
The company's minimum attractive rate of return is = 8% per year.
Let minimum inventory loss prevention be x To break even
PW ( costs) = PW ( inventory loss prevention)
PW ( costs) = 35000000 + 210000 ( P/A, 8%, 13) - 140000 ( P/F, 8%, 13)
= 35000000 + 1659793 - 51478
= 36659793 - 51478
= 36,608,315
PW ( cost) = 36,608,315
PW ( benefit) = x ( P/A, 8%,13)
= 7.904 x
Now,
36608315 = 7.904 x
x = 36608315/7.904
x = $4,631,619
So, the minimum annual inventory loss prevention required to make the investment economically acceptable and the net annual worth of the investment should be = $4.6 million.
Rahul Sunny answered 1 year agoRelated Solutions
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