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?
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 10P
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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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