Following your studies you are hired as the manger for a local pharmacy. Your fe

Question

Following your studies you are hired as the manger for a local pharmacy. Your feel that they could greatly benefits from an investment in a ScriptPro automated dispensing system at a cost of $200,000, but, the owner is reluctant. Fortunately, because of your finance expertise, you can show WHY the investment makes sense! You happen to know that the owner currently earns a 11.30% return on the pharmacy, so you suspect that if you can show that the purchase of the ScriptPro system generates a return above that, you will have a compelling case! You've done some research on the impact on this system, and believe that it were purchased today, it would have the following positive impact on operating cashflow over it's usable life: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 $76,000 $94,000 $66,000 $81,000 $77,000 $85,000 Those figures do not include the purchase price, they do include all other benefits (tax, depreciation, etc.) What is the Internal Rate of Return (IRR) of purchasing the ScriptPro system? Is the owner likely to be convinced that this investment is one worth making? Explain why. We known that: ScriptPro Purchase Price = $200,000 Current Pharmacy Return = 11.30%

Explanation / Answer

Let the IRR be R

So 200000 = 76000/(R^1) + 94000/(R^2)+66000/(R^3)+81000/(R^4)+77000/(R^5)+85000/(R^6)

By solving we get R=32.4%

Since the firm currently earns a mere 11.3% , this new investment which will give a return of 32.4% is a very good investment. So this investment should be done.

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

---