Reference no: EM132616233

The Diamond Calculators for Finance (DCF) Company was one of the companies formed a number of years ago by Jeff "Spot" Diamond. The company, while not known by all MBA students, has discovered a profitable niche market by renting out HP12c calculators on a semester or year long basis to MBA students who do not want to incur the cost of buying the calculator as suggested by their unreasonable finance professors who most students assume own stock in HP. In the past, the DCF Company has suffered from cost inefficiencies in its inventory management system. As a result, "Spot" is considering the purchase of a $240,000 computer-based inventory management equipment system that utilizes some robotic components. If purchased, the equipment will be depreciated fully to zero via straight line depreciation over its 4 year life. At the end of its useful life, the company expects the equipment will be able to be sold for $20,000. Prior to consideration of tax impacts, the system will save the DCF Company $70,000 in on-going operating costs. This expected $70,000 in cost savings excludes any impact of the equipment depreciation expense on free cash flow. In addition to reducing operating costs, the new inventory management equipment system would allow DCF to carry less total inventory. This ability to carry less inventory would reduce the amount of net working capital by the amount of $50,000 throughout the life of the new inventory management equipment and this reduction would be immediate. Of course, at the end of the equipment's 4-year life, the amount of net working capital needed for the business would return to the same level that was necessary prior to the purchase and implementation of the inventory management system. ` Assuming an interest rate of 8% for evaluating this project and assuming the DCF Company is profitable and pays a 30% tax rate on profits and a 20% tax rate on capital gains, should "Spot" Diamond go ahead with the purchase? Please calculate the NPV of the computer-based inventory management equipment system and give me your recommendation regarding its purchase. Be sure to clearly illustrate your thinking and work.