Corp. Finance Question

the_stranger's picture
Rank: Chimp | 7

I am going over old corporate finance materials and am stuck on this problem, which seems like it has a little bit of cost accounting involved. Any help with this would be greatly appreciated. It is a capital investment decision question.

I have no problem with the capital expenditures, depreciation, maint. costs, etc. Or the discounting back to PV. But my hold up is here:

The investment will yield a yearly, permanant reduction of 30% in raw materials inventory. This reduction will start one year after installation.

Data:

Most recent sales: 3.2 million units
projected annual growth rate: 5%
Avg. price / unit: $22
Material cost / unit: $10
Labor cost / unit: $3
SG&A $4.5 million
Collection period (days sales) 60
Raw material inventory (days purchases) 25
Finished goods inventory (days sales) 15
Payment period (days purchases) 30

How do I go about calculating this cost savings? Thanks in advance.

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Feb 3, 2009
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