42 Saina Supplies leases and sells materials, tools, and equipment and provides add-on services such as ground maintenance and waterproofing to construction and mining sites. SS has grown rapidly over...

42
Saina Supplies leases and sells materials, tools, and equipment and provides add-on services such as ground maintenance and waterproofing to construction and mining sites. SS has grown rapidly over the past few years. The owner, Saina Torrance, believes that for the company to continue to scale, it needs to install a professional information system rather than relying on intuition and Excel analyses. After some research, Saina’s CFO reports back with the following data about a data warehousing and analytics system that she views as promising:

• The system will cost $750,000. For tax purposes, it can be depreciated straight-line to a zero terminal value over a 5-year useful life. However, the CFO expects that the system will still be worth $50,000 at that time.


• There is an additional $75,000 annual fee for software upgrades and technical support from the vendor.


• By providing better services and targeting and reaching more clients with the new system, Saina expects a $500,000 increase in revenue in the first year after installation. Revenues will grow by 5%
  
  each year
  
  Saina’s contribution margin is 60%.


• Due to greater efficiency in ordering and dispatching supplies and collecting receivables, working-capital requirements will decrease by $100,000.


• Saina will be able to reduce leased warehouse space, saving $40,000 annually.


• Saina Supplies pays income tax of 30% and requires an after-tax rate of return of 12%.

Assume that all cash flows occur at year-end except for initial investment amounts.

• If Saina purchases and installs the new information system, what is the expected incremental after-tax cash flow from operations during each of the 5 years?


• Compute the net present value of installing the information system at Saina Supplies.


• In addition to the analysis in requirement 2, what nonfinancial factors you would consider in making the decision about the information system?