Managing Corporate Capital Investment and Capital Structure
1. What are the sources of cash flow/value gains from the proposed enterprise resource planning (ERP) system? How do they differ in their taxability and their persistence through time?
Cash Flow Gains:
There are four primary forms of increased cash flows from the proposed ERP system. The first increase in cash flow comes from the reduction in days sales of inventory (DSI). The current DSI level for the company is 51 days, project Atlantic is expected to decrease from 51 to 12 days. The new system is far more operationally efficient and is expected to have a direct benefit on supply chain. The second increase in cash flows comes directly from the increased sales the will benefit the company from the implementation of the Atlantis ERP system. The system proposes savings of 25% of the change of improved product availability.
The increased sales contribute to the bottom line of Whirlpool Europe. The third value gain from the realization of the new system is from the increase in gross margin. Because current systems are different in individual lines of businesses the new holistic system is beneficial because it allows for more accurate decisions to be made. Whirlpool suggests that there should be an increase in gross margin of .25% by the second year of completion. The final increase in cash flow is derived from other general efficiencies that are products of Atlantis. For instance the need for finance and desk employees is expected to decrease by 15% and 18% respectively. This decrease is a cost savings to the company of $45,000 and $40,000 per employee. Other cost savings are the reduction in bad debt expense and information savings.
Two of the cash flows/value gains are persistent and two are not.