Question

Ayayai Company manufactures automobile components for the worldwide market. The company has three large production facilities in Virginia, New Jersey, and California, which have been operating for many years. Brett Harker, vice president of production, believes it is time to upgrade operations by implementing computer-integrated manufacturing (CIM) at one of the plants.

Brett has asked corporate controller Connie Carson to gather information about the costs and benefits of implementing CIM. Carson has gathered the following data:

Initial equipment cost		$	6,006,000
Working capital required at start-up		$	600,600
Salvage value of existing equipment		$	75,075
Annual operating cost savings		$	840,840
Salvage value of new equipment at end of its useful life		$	200,200
Working capital released at end of its useful life		$	600,600
Useful life of equipment			10 years

Ayayai Company uses a 12% discount rate.

Click below to view the factor table.

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Please keep all information in 4 decimal places until said otherwise!!!!!

1). Calculate the net present value of Ayayai’s proposed investment in CIM. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971. Enter negative amounts using a negative sign preceding the number, e.g. -59,991 or parentheses, e.g. (59,991).)

2). Use Excel or a similar spreadsheet application to calculate the internal rate of return on Ayayai’s proposed investment. (Round internal rate of return to 2 decimal places, e.g. 15.25%.)

Answer 1

The investment should not be made since npv is negative and IRR is lower than cost of capital

1 Calculation of Net present value Years 1 Initial equipment cost Initial working capital Salvage value of existing equipment Annual operating costs savings Release of Working capital Salvage value Net present value of cash outflows 1 1 1 to 10 10th year Cash Present PV factor Outflow value 12% (Inflow) Cash flow - $6,006,000 1.0000-$6,006,000 -$600,600 1.0000 $600,600 $75,075 1.0000 $75,075 $840,840 5.6502 $4,750,914 $600,600 0.3220 $193,393 $200,2001 0.3220 $64,464 -$1,522,753 10th year 2 Internal rate of return Year O- Cash Outflow Cash inflows: Year 1 - $6,531,525 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 $840,840 $840,840 $840,840 $840,840 $840,840 $840,840 $840,840 $840,840 $840,840 $1,641,640 (Includes release of working capital and salvage value) 6.31% Year 9 Year 10 Internal rate of return