Inventory investment. Paterson Products is considering leasing a computerized in

Question

Inventory investment.   Paterson Products is considering leasing a computerized inventory control system to reduce its average inventories. The annual cost of the system is $46,000. It is expected that with the system the firm’s average inventory will decline by 50% from its current level of $980,000. The firm can earn 20% per year on equal-risk investments.

How much of a reduction in average inventory will result from the proposed installation of the computerized inventory control system?

How much, if any, annual savings will the firm realize on the reduced level of average inventory?

Should the firm lease the computerized inventory control system? Explain why or why not.

Explanation / Answer

Answer:1 Reduction in Average inventory = $980,000 *50% = $490,000

Answer:2: Earnings $490000 *20% = $98,000

Answer:3 Yes the firm lease the computerized inventory control system. Because Net benefit from the leasing is $52000 (98000-46000).

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