Stollen Company manufactures marbles.
Rollen Stollen, CEO, is unhappy with the overall inventory shrinkage levels at his factory.
When he is present and observing, he never notices any inventory shrinkage. He attributes this to his amazing management skills. One night, he was telling his wife what an amazing manager he is: that as long as he’s standing on the factory floor, without even saying a word, there are suddenly no mistakes and no inventory shrinkage. Rollen wishes he could duplicate himself so that he could always be at work.
Rollen’s wife tells him that his employees are stealing from him.
“Eee gad!” he cries, “it can’t be true!”
The next day Rollen calls in a security company. They tell him that he could outfit the whole workplace with state-of-the-art cameras at a cost of $50,000. The security system would have a useful life of 10 years and no residual value.
Last year Rollen had $12,000 in inventory shrinkage.
If all $12,000 of shrinkage was related to theft, and the security system will prevent all future theft, what is the Internal Rate of Return (IRR) of Rollen investing in the security system?