Question

Diller products Inc. is considering purchasing a robot to update their flexible manufacturing system. selected data relating to the robot are provided below

Cost of robot 1,600,000

Software and installation 700,000

Annual savings in labor cost ?

Annual savings in inventory carrying costs 190,000

Monthy increase in power and maintenance costs.    2,500

Salvage value in 12 years 90,000

Useful life 12 years

Engineering statistics suggest that the use of the robot will result in a savings of 40,000 direct labor hours each year. The labor rate is $8 per hour.  

REQUIRED

1. Compute the net present value of the proposed investment in the robot. Use a desired rate of return of 14%. based on this data would you recommend that the robot be purchased? Explain.

2. Assume that the robot is purchased. At the end of the first year, some items didn't work out as planned. Software and installation costs were 125,000 more than estimated and direct labor has been reduced by only 35,000 hours per year, rather than by 40,000 hours. Assuming that all other items of cost data were accurate, does it appear that the company made a wise investment? Show computations, using the net present value method as in (2) above. (Hint: It might be helpful to place yourself back at the beginning of the first year, with the new data.

Answer 1

The answer has been presented in the supporting sheet. All the parts has been solved with detailed explanation and calculation. For detailed answer refer to the supporting sheet.

AB Answer 2 Part 1) 4. The net present value = present value of net cash inflows - present value of beginning cash outflow + present value of salvage value 5 = ((190000-2500*12)+(40000*8))*((1-(1.14)^-12)/.14)) - (1600000+700000) +(90000/(1.14)^12) 6 = ( 480000*5.660292) - 2300000 + 18680.32 7 = $ 435621 9 Part 2) 10 The net present value = present value of net cash inflows - present value of beginning cash outflow + present value of salvage value 11 = ((190000-(2500*12)+(35000*8))*((1-(1.14)^-12)/.14)) - (1600000+700000+125000) +(90000/(1.14)^12) 12 = ( 440000*5.660292) - 2425000 + 18680.32 13 = $ 84209 15 Since the NPV of the project is positive it means the company has made wise decision. 17 For any help please comment in the comment box 18 Thank You