Vickery and Vojnovic is a business partnership set up by Robin Vickery and Kaspar Vojnovic some years ago. The partners are now considering the installation of a new computer system using specially written software to streamline the business's warehousing operations. The initial outlay on the project will be substantial. A feasibility study has already cost £20 000. Kaspar estimates that payments to the software house will be £100 000 immediately, with a further £75 000 in a year's time. New equipment and installation and testing costs will amount to £148 000 during the first year (it should be assumed for appraisal purposes that these costs arise at time 1). The plan is that the new system should go live in one year's time. After that point the business should start to reap considerable benefits from what will be, essentially, a paperless ordering and shipment tracking system. The partners plan to reduce their staffing levels considerably during the first two years during which the system is in operation and there will be other cost saving benefits including a reduction in office storage space, stationery, postage and other costs. Because of the increased efficiency of the operation, the partners also expect substantial increases in sales. The net cash inflows forecast from the installation of the new systems are as follows:
Vickery and Vojnovic is a business partnership set up by Robin Vickery and Kaspar Vojnovic some years ago. The partners are now considering the installation of a new computer system using specially written software to streamline the business's warehousing operations. The initial outlay on the project will be substantial. A feasibility study has already cost £20 000. Kaspar estimates that payments to the software house will be £100 000 immediately, with a further £75 000 in a year's time. New equipment and installation and testing costs will amount to £148 000 during the first year (it should be assumed for appraisal purposes that these costs arise at time 1). The plan is that the new system should go live in one year's time. After that point the business should start to reap considerable benefits from what will be, essentially, a paperless ordering and shipment tracking system. The partners plan to reduce their staffing levels considerably during the first two years during which the system is in operation and there will be other cost saving benefits including a reduction in office storage space, stationery, postage and other costs. Because of the increased efficiency of the operation, the partners also expect substantial increases in sales. The net cash inflows forecast from the installation of the new systems are as follows:
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Transcribed Image Text:Vickery and Vojnovic is a business partnership set up by Robin Vickery and Kaspar Vojnovic some
years ago. The partners are now considering the installation of a new computer system using
specially written software to streamline the business's warehousing operations. The initial outlay on
the project will be substantial. A feasibility study has already cost £20 000. Kaspar estimates that
payments to the software house will be £100 000 immediately, with a further £75 000 in a year's
time. New equipment and installation and testing costs will amount to £148 000 during the first year
(it should be assumed for appraisal purposes that these costs arise at time 1). The plan is that the
new system should go live in one year's time. After that point the business should start to reap
considerable benefits from what will be, essentially, a paperless ordering and shipment tracking
system. The partners plan to reduce their staffing levels considerably during the first two years
during which the system is in operation and there will be other cost saving benefits including a
reduction in office storage space, stationery, postage and other costs. Because of the increased
efficiency of the operation, the partners also expect substantial increases in sales. The net cash
inflows forecast from the installation of the new systems are as follows:
At the end of year six, the partners anticipate that the system will have to be scrapped and replaced
with whatever is the latest technology at the time. There will be no residual value in the system at
that point.
i)
ii)
Time
2
3
4
5
6
The partners have asked you to appraise the project to see how quickly it will pay back. You offer to
appraise the project using discounted cash flow techniques, although Robin (who did a business
course a few years ago) is distinctly sceptical about this approach: 'The good thing about payback is
that you can see immediately how long it's going to take to recoup the cost of the investment.
Discounted cash flow doesn't make any sense to me'. However, he agrees that it might just be
helpful to see what the NPV of the project is, and he estimates the business's cost of capital at 11%.
Required
ra
rb
N₂
N₂
£000
184
159
108
96
40
IRR = r₂+
calculate the payback period for the project
calculate the NPV of the project using 11% as the discount rate
calculate IRR
NPV₁
; (rb-ra)
NPV₁-NPV
= lower discount rate chosen
= higher discount rate chosen
= NPV at ra
= NPV at rb
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education