How will each option affect the firm’s financial ratios, which investors watch very closely? Which one would be better for the company?
There are two options, which James Brunswick’s two buddies have proposed. Frank proposal was to invest in new infrastructure while Lew suggests streamlining the order fulfillment system.
The capital costs of Lew’s system would run from $5.3 million for a basic level implementation and $8 million for a fully integrated system. Operating costs and training would be increased $0.8 million per year, essentially increasing their liabilities, although it would also result in huge savings. Basic implementation would result in 10% savings in direct shipping and labor expenses, while the fully integrated system would save them up to 16%. The overall system would decrease their assets and increase their liabilities due to the cash that would be spent on the system and new training and operating costs. The end result for a basic system would cost $6.1 million and only save them $672,600 in labor and $893,100 in shipping. The fully integrated system would cost BDI $8.8 million and save them $1,428,960 in shipping and $1,076,160 in labor. A basic level system would decrease net income by $4,534,300 while a fully integrated system would decrease net income by $6,294,880.
Frank’s option would cost $2 million for property and $10 million for plant and equipment. This investment would also allow Brunswick Distribution Inc. to increase annual sales by $3,600,000. At the same time, this would increase other operating costs as shipping costs go up $955,000, material & labor costs increase by 6% ($357,780 for materials & $403,560 for labor), and accounts receivable up by $1,500,000. The end result of this system would cost them $13,716,340 and save them $5,100,000. This would result in a decrease of $8,616,340.
The better option for BDI would be Frank’s option of investing in new infrastructure, because in the long-term...
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