Cost benefit analysis CanGo Essay

VIA Consulting has been hired in CanGos behalf to assist its management meeting in the decision making of the implementation of the new operating ASRS transcription, and we came extinct with the following fiscal information and data. CanGo started operating as a tenuous company in 2006. In 2008 the company reported a give the axe profit of $7,000,000 and $15,000,000 for the 2009. The companys most profitable division has been its online ledger sale. Due to the fact that CanGo has been increasing its gross revenue and revenue for much than one C%, the company has demonst rank that it is a profitable organization, but at the similar time, it has been reporting an maturation on clients complains for a lacking(predicate) customer service. According to management at the organization, some of the issues are vain personnel, the time for an order to be processed is too long, small warehouse lay, and short inventory. CanGo is looking for a new operating system that allows them t o mode arrange 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 defined storage locations.This type of system is utilized majorly for companies with a very high volume of loads organism moved into and turn up of storage. The benefits of an ASRS system include reduced labor for transporting items into and out of inventory, reduced inventory levels, more accurate tracking of inventory, and space savings (Wikipedia, 2014). VIA Consulting is going to help CanGo to calculate the salutes of the new ASRS system. Utilizing tools like last get protect (NPV) and internal rate of return (IRR), we go away construe and evaluate if the enthronization provide benefit economically the organization. The cost for a new ASRS system isapproximately of $2,000,000 and according with the most recent financial statements,CanGo, Inc. Wor king with child(p). $132,520,000 make up of Operations. 32,560,000 immediate payment inflow 58,000.000 fund.. 32,000,000It is necessary to sleep with if the company has the economic resources to acquire the new automatise system and pay the cost of operation derived from the render. To find out, we need to know three major costs Cost of capital, net profit Present rate (NPV) and Internal Rate of Return (IRR). The ASRS and costs of operation represent the silver Outflows, of this fancy and the revenues and profits represent the Cash Inflow. Looking at the Net Profit, or specie inflow, CanGo has limited capital to invest however, the company may find the monetary resources through bonds, private 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 meat that a firm must make believe on its assets in order for those assets to add value to the firm. On otherwise words, capital is the rate at which assets must provide cash inflows to apologize their cost. Therefore, if the rate of return of the net cash flows from a project, including the initial investment and all future net cash flows, exceeds the cost of capital, the project will add to the value of the firm. For example, when the ASRS investment get downs a return of 21.31 percent, while the cost of capital was as plused to be 15 percent. The Net Present note value (NPV), is one of the most common methods used to evaluate investments. At its simplest, NPV is the present value computed by using the firms cost of capital as the cut 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 an d both operators on the second shift to pick books at the average rate of 45 books per hour, but during heavy demand spots, the pick area laughingstock accommodate 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 positive 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 similarly calculate the time and the amount of money the capital invested in the project will have generate profits.The NPV calculation provides a dollar measure 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 compare it to t he 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 suitable 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 or triple the routine 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 have more space available to keep up to date the inventory. Customers will receive their books blist ering when the company wont have to order books from different distributors and hold back 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). VIAconsulting advices CanGo, Inc., that the new ASRS system will benefit the company increasing productivity and profits for the company.ReferencesRetrieved on September 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