Cost benefit analysis CanGo Essay

VIA Consulting has been hired in CanGos behalf to assist its management group in the decision making of the performance of the saucy in appendage(p) ASRS system, and we came out with the following financial information and info. CanGo started operating as a small comp some(prenominal) in 2006. In 2008 the company reported a net profit of $7,000,000 and $15,000,000 for the 2009. The companys close gainful division has been its online book sale. Due to the fact that CanGo has been change magnitude its gross sales and revenue for more than 100%, the company has demonst come out that it is a profitable organization, but at the aforesaid(prenominal) epoch, it has been reporting an increase on thickenings recoils for a deficient customer service. According to management at the organization, some of the issues are unproductive personnel, the time for an order to be urbane is too long, small warehouse space, and short inventory. CanGo is looking for a new operating system that allows them to decrease labor, lower space and increase productivity and revenue. An ASRS (Automated storage and retrieval system) consists of a variety of computer-controlled systems for automatically placing and retrieving loads from delimit storage locations.This type of system is utilized majorly for companies with a very higher(prenominal) volume of loads macrocosm moved into and out of storage. The gathers of an ASRS system embarrass reduced labor for transporting items into and out of inventory, reduced inventory levels, more straight tracking of inventory, and space savings (Wikipedia, 2014). VIA Consulting is going to help CanGo to calculate the be of the new ASRS system. Utilizing tools like net grant nurse (NPV) and internal rate of check (IRR), we bequeath examine and evaluate if the investment exit benefit scotchally the organization. The live for a new ASRS system is approximately of $2,000,000 and match with the most recent financial statements,Can Go, Inc. Working jacket. $132,520,000 appeal of operations. 32,560,000 change inflow 58,000.000Inventory.. 32,000,000It is necessary to know if the company has the economic resources to acquire the new automated system and finance the cost of operation derived from the hear. To find out, we need to know three major be Cost of capital, Net Present Value (NPV) and Internal Rate of Return (IRR). The ASRS and costs of operation represent the capital Outflows, of this figure and the revenues and profits represent the Cash Inflow. Looking at the Net Profit, or interchange inflow, CanGo has limited capital to invest however, the company may find the monetary resources through bonds, common soldier investors and banks that are willing to finance the project as long as they receive their dividends or profits. Cost of Capital reflects the minimum amount that a blind drunk essential earn on its assets in order for those assets to total value to the unbendable. On other words, capita l is the rate at which assets must provide property inflows to justify their cost. Therefore, if the rate of return of the net change flows from a project, including the initial investment and all future net money flows, exceeds the cost of capital, the project will add to the value of the firm. For example, when the ASRS investment generates a return of 21.31 percent, while the cost of capital was assumed to be 15 percent. The Net Present Value (NPV), is one of the most common methods employ to evaluate investments. At its simplest, NPV is the present value computed by using the firms cost of capital as the discount rate of cash inflows, minus the present value of cash outflows, including the initial investment. NPV= PV of Cash inflows PV of Cash OutflowAccording to the divisional revenues, in 2009, the company reported revenues (Cash Inflow) for $58,000,000 being books the most profitable sales division with $15,000,000. Actually, the company employs 6 operators on the first shift and two operators on the second shift to pluck books at the average rate of 45 books per hour, but during heavy take in periods, the pick area can accommo get a line eight operators. Salaries expense and machinery and equipment would be the companys cash outflow. The cash outflow is $2,250,000. NPV= 58,000,000- 2,250,000 =55,750,000Projects with a compulsive NPV add value to the firm.Cash inflows and outflows can occur at any time during the project. The NPV of the project is the sum of the present values of the net cash flows for each time period t, where t takes on the values 0 (the beginning of the project) through N (the end of the project). With this formula we can as well calculate the time and the amount of money the capital invested in the project will feature generate profits.The NPV calculation provides a dollar tax of how much a project is expected to add to a firms value. Analysts may also want to know what the rate of return on a project is in order to c ompare it to the cost of capital. This rate is called the internal rate of return, or IRR. The IRR is the discount rate that makes the present value of the cash inflows equal to the present value of the cash outflows. This is the same as saying that the IRR is the discount rate that makes the net present value equal to zero. The formula that represents the IRR isIn conclusion, and taking into consideration the financial data of Divisional Revenues from 2009 for $58,000,000 and cash outflow of $2,250,000 to 3,000,000 (ASRS equipment, labor and other expenses) the new project will allow CanGo to increase productivity from 45 books per hour to double up or triple the number of books picked per hour and at the same time employing less people. This will derivate in an increase of net revenue for the company. Also, the employees will be able to more accurately track inventory, and the warehouse will stick more space available to keep up to date the inventory. Customers will receive thei r books faster when the company wont have to order books from different distributors and wait too long to receive them, and then, packing them and sending them to customers. The employees also will be able to see if they have the ordered book in stock and clients wont complain for receiving the wrong book(s). VIA consulting advices CanGo, Inc., that the new ASRS system will benefit the company increasing productivity and profits for the company.ReferencesRetrieved on kinfolk 2014, from https//www0.gsb.columbia.edu/premba/finance/s5/s5_5.cfmRetrieved on September 2014, from http//en.wikipedia.org/wiki/Automated_storage_and_retrieval_system