Question

A company is considering the purchase of a 2,00,000 computer-based inventory management system. It will be depreciated straight line to zero over its four-year life. It will be worth 30,000 at the end of that time. The system will save 60,000 before taxes in inventory-related costs. The relevant tax rate is 39%. The new setup is more efficient than the earlier one, as less total inventory is kept on hold thereby freeing 45000 in net working capital. Find the operating cash flow

Answer 1

To find the operating cash flow, calculate the net present value (NPV) of the cash flows associated with the purchase of the inventory management system. The NPV is $221,600.

Step-by-step explanation:

To find the operating cash flow, we need to calculate the net present value (NPV) of the cash flows associated with the purchase of the inventory management system. The cash flows include the cost of the system, the tax savings, and the net working capital.

The cost of the system is $200,000.

The tax savings can be calculated by multiplying the inventory-related costs saved ($60,000) by the tax rate (39%). So, the tax savings is $23,400.

The net working capital freed up is $45,000.

The NPV of the cash flows can be calculated using the formula: NPV = Cost of the system - Tax savings + Net working capital

Substituting the values, NPV = $200,000 - $23,400 + $45,000 = $221,600.