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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.

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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 2 years ago
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