You are considering a new online, web based prescription refiling system for your (for profit) pharmacy. The installed price of the system’s hardware is $25,000 and up front e-commerce software development costs are $20,000. If you buy the new system, annual operating costs such as additional labor, inventory, supplies and system maintenance costs will be $9,000 per year. New sales from the system will be $24,000 per year. You anticipate you will use the system for 5 years, then sell the server and technology for $1,000. Your marginal tax rate is 35%, you depreciate all your assets on a straight line basis (even though the IRS does not allow it, it is easier). Your cost of capital (discount rate) is 7%.
Feel free to perform your NPV and IRR calculations using Excel. Please attach the excel sheet, not a copy, so I can see the formula calculations.
a. What are the cash flows?
b. What is the NPV and IRR? Should you buy the system?
c. How would your cash flows and NPV change if your online business reduced your walk in sales for candy and makeup by $5,000 per year? (Show the changes to cash flow and NPV)