Question

Saxon Products, Inc., is investigating the purchase of a robot for use on the company’s assembly line. Selected data relating to the robot are provided below:

Cost of the robot	$	2,000,000
Installation and software	$	490,000
Annual savings in inventory carrying costs	$	218,000
Annual increase in power and maintenance costs	$	38,000
Salvage value in 5 years	$	78,000
Useful life		5	years

In addition to the data above, engineering studies suggest that use of the robot will result in a savings of 33,000 direct labor-hours each year. The labor rate is $16 per hour. Also, the smoother work flow made possible by the use of automation will allow the company to reduce the amount of inventory on hand by $408,000. This inventory reduction will take place at the end of the first year of operation; the released funds will be available for use elsewhere in the company. Saxon Products has a 19% required rate of return.

Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables.

Required:

1. Determine the annual net cost savings if the robot is purchased. (Do not include the $408,000 inventory reduction or the salvage value in this computation.)

2-a. Compute the net present value of the proposed investment in the robot.

2-b. Based on these data, would you recommend that the robot be purchased?

3-a. Assume that the robot is purchased. However, due to unforeseen problems, software and installation costs were $83,000 more than estimated and direct labor could only be reduced by 26,500 hours per year, rather than the original estimate of 33,000 hours. Assuming that all other cost data is accurate, what would a postaudit suggest is the actual net present value of this investment?

3-b. Does it appear that the company made a wise investment?

4-a. Which of the following are intangible benefits associated with the new automated equipment?

4-b. Based on your analysis in Requirement 3 above, compute for the president the minimum dollar amount of annual cash inflow that would be needed from the benefits in part 4(a) for the automated equipment to yield a 19% rate of return.

Complete this question by entering your answers in the tabs below.

Determine the annual net cost savings if the robot is purchased. (Do not include the $408,000 inventory reduction or the salvage value in this computation.)

	Annual net cost savings

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• Req 1
• Req 2A
• Req 2B
• Req 3A
• Req 3B
• Req 4A
• Req 4B

Compute the net present value of the proposed investment in the robot. (Round your final answer to the nearest whole dollar amount.)

	Net present value

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• Req 1
• Req 2A
• Req 2B
• Req 3A
• Req 3B
• Req 4A
• Req 4B

Based on these data, would you recommend that the robot be purchased?

	Yesradio button unchecked1 of 2 Noradio button unchecked2 of 2

Complete this question by entering your answers in the tabs below.

• Req 1
• Req 2A
• Req 2B
• Req 3A
• Req 3B
• Req 4A
• Req 4B

Assume that the robot is purchased. However, due to unforeseen problems, software and installation costs were $83,000 more than estimated and direct labor could only be reduced by 26,500 hours per year, rather than the original estimate of 33,000 hours. Assuming that all other cost data is accurate, what would a postaudit suggest is the actual net present value of this investment? (Enter negative amount with a minus sign. Round your final answer to the nearest whole dollar amount.)

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	Net present value

Complete this question by entering your answers in the tabs below.

• Req 1
• Req 2A
• Req 2B
• Req 3A
• Req 3B
• Req 4A
• Req 4B

Does it appear that the company made a wise investment?

	Yesradio button unchecked1 of 2 Noradio button unchecked2 of 2

• Req 3A
• Req 4A

• Complete this question by entering your answers in the tabs below.

• Req 1
• Req 2A
• Req 2B
• Req 3A
• Req 3B
• Req 4A
• Req 4B

• Which of the following are intangible benefits associated with the new automated equipment? (Select which of the following statements (is) are true by selecting an "X".)

  	Reduction in inventories Greater throughput Increase in inventories Greater variety of products Higher quality Reduced cost per unit of raw material

• Req 3B
• Req 4B

• Complete this question by entering your answers in the tabs below.

• Req 1
• Req 2A
• Req 2B
• Req 3A
• Req 3B
• Req 4A
• Req 4B

• Based on your analysis in Requirement 3 above, compute for the president the minimum dollar amount of annual cash inflow that would be needed from the benefits in part 4(a) for the automated equipment to yield a 19% rate of return. (Round your final answer to the nearest whole dollar amount.)

  	Amount of annual cash inflow

• Req 4A
• Req 4B

Answer 1

The answer is attached below. Please refer

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1) Determination of menneeal cost saving Cost 1$ (Amount) savings Inventory carrying cost 2 18.000 Saving in direct labour cost (33000 hours x $16) 528000 Total saving 746000 Increased cost Power & maintainance (38000) 708000 Net saning in cost (cost saving" - Ocreased) cost . Annual net saving = $708000

qa). Net present value of Povestment Particulars Year 0 Year 1 year 2 Year Year 4 Year 5 ! Cash outflow . Cost of 2000000 Robot 2) Installation 490000 38000 39000 39000 38000 3) Powerg maintain A Total cash 9490.000 38.000 38000 38000 38000 38000 outflow Caub inflow Saving in 218.000 218000 28000 218000 18000 carry cost 2) Saving in 528000 528000 S28000 528000 528000 labour cost 3) Release of gopedo 408.000 inventory 4) Salvage 78000 © Total inflow gen 346000 796000 244000 824000 @ Net Bonn e 708,000 703,000 708000 786.000 (C=B-A) (2 490000 175400W Tu bodo -

© Discounts factor@ 197 i 10.89 0.70610.5934049870.4190 (1/119) 11.1992 | 1/1.19) X1.1977 X1.1955 Net after Queen 20 discocendinga490000 933440 4.9993 420127 353080|329334 6 = CX D Cash flows year o (2490ooo) year I - ģ37490 Year 2 a 499919 Year 3 - 420127 year t - 353080 Yeas 5 oos 329 334 $49900 Net Present Value 2.b) Based on above dala, NPV (net Present value) ung positive Hence "Saxon Product Inc" must go ahead with project..

20 3 a) Net present value in changed scenario Particular years year Il year? Year 3 year & [year 5 Cash outflow cost of 2000000 Robot ™ (190000 483000) ) Install 573000 3) Powen & maintain 38000 38000 38000 38000 38000 © Total outflow 25 73000 38000 38000 38000 38000 38000 Cash inflow ! Save in 218000 218000 Spoo 218000 218000 carry cost 2) Saveis 424000 424000 424005 424600 429000 labour cost (26500XL) 3) Release of 408000 inventory 78000 4) salvage ® cash in low - 1050000 642000 672000 642000 720000 @ Nel (a$73000) 1012000 604000 604000 600000 682000 C = B - 0.84 0.7061 0.5934.0.4987 0.4190 1 Discount factor Nav_ E 2CXD (2573000) 850080 426989 358414 301215 285758

Cashflows Year o Year 1 Year 2 Year 3 Year 4 (2573000). 850080 426,484 358,419 301215.one 285958 $(351049) Year 5 doso NPV 36) The NPU is negetive. Hence the company made wrong decision by investing in Robot. will GORIC No, the company did not make wise decision, 49) There are soveral intangible benefits associaled with enterprise if Robots are purchase a) Effective etilisation of resources la b) In a highly competetive environment Robots are best suitable for sa cobduct of business c) long term benefits & a most accurate data compilation 10 e) Reduction 90 warfage, Scraps etc

4b) Minimum dollar cash inflows needed to make break-even 7 Total discount factor 3.0572 (0.84 +0.706170.5934 to.4987 +0.4190) NPV ($351049) Minimum Entlow = $114827 needed (excess) (C = B/A) (351,049/3.0572)_ Current anneal cashflow (net) $642000 Add. Minimum in flow (excess) Minimum $acashinflow to break even $11.4827 $756827