Question: NPV of information system, income taxes. Saina Supplies leases and sells materials, tools, and equipment and also provides add-on services such as ground maintenance and waterproofing to construction and mining sites. The company has grown rapidly over the past few years. The owner, Saina Torrance, feels 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.
- The ability to provide better services and to target and reach more clients as a result of the new system will directly result in a $500,000 increase in revenues for Saina in the first year after installation. Revenues will grow by 5% each year thereafter. Saina's contribution margin is 60%.
- Due to greater efficiency in ordering and dispatching supplies, as well as in collecting receivables, the firm's working-capital requirements will decrease by $100,000.
- Saina will also be able to reduce the amount of warehouse space it currently leases, saving $40,000 annually in the process.
- Saina Supplies pays an 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.
1. If Saina decides to purchase and install the new information system, what is the expected incremental after-tax cash flow from operations during each of the 5 years?
2. Compute the net present value of installing the information system at Saina Supplies.
3. In addition to the analysis in requirement 2, what nonfinancial factors you would consider in making the decision about the information system?