ABC is considering changing its distribution system from outsourcing to building its own. To make this shift, ABC will need to incur an upfront cost of £25 million, primarily in building warehouses in London. This cost will be capitalised and depreciated straight line over 5 years to a salvage value of zero. As a result of the change, ABC expects to be able to reduce what it spends on distribution for the next 5 years. If ABC's cost of capital is 10% and its tax rate is 40%, how much would the annual pre - tax savings in distribution expenses have to be, each year for the next 5 years, for the shift to make economic sense?
ABC is considering changing its distribution system from outsourcing to building its own. To make this shift, ABC will need to incur an upfront cost of £25 million, primarily in building warehouses in London. This cost will be capitalised and depreciated straight line over 5 years to a salvage value of zero. As a result of the change, ABC expects to be able to reduce what it spends on distribution for the next 5 years. If ABC's cost of capital is 10% and its tax rate is 40%, how much would the annual pre - tax savings in distribution expenses have to be, each year for the next 5 years, for the shift to make economic sense?
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter13: Capital Budgeting: Estimating Cash Flows And Analyzing Risk
Section: Chapter Questions
Problem 1P: Talbot Industries is considering launching a new product. The new manufacturing equipment will cost...
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ABC is considering changing its distribution system from outsourcing to building its own. To make this shift, ABC will need to incur an upfront cost of £25 million, primarily in building warehouses in London. This cost will be capitalised and depreciated straight line over 5 years to a salvage value of zero. As a result of the change, ABC expects to be able to reduce what it spends on distribution for the next 5 years. If ABC's cost of capital is 10% and its tax rate is 40%, how much would the annual pre - tax savings in distribution expenses have to be, each year for the next 5 years, for the shift to make economic sense?
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