Falcon Catering is thinking about installing a new piece of equipment The following data are provided:
COST OF EQUIPMENT $1600 000
INSTALLATION $700 000
ANNUAL SAVING ON INVENTORY CARRYING COSTS
MONTHLY INCREASE IN MAINTENANCE COSTS
SALVAGE VALUE IN 12 YEARS
USEFUL LIFE 12 years
a) Engineering studies suggest that use of the equipment will result in a savings of 20,000 direct labor hours each year.
b) The labor rate is $16 per hour.
c) The smoother work flow made possible by the installation will allow the company to reduce the amount of inventory on hand by $300,000. The released funds will be available for use elsewhere in the company. This inventory reduction will take place in the first year of operation.
d) The company requires a 20% return on all investments in automated equipment.
e) There is no income taxes
1) Determine the net annual cost savings if the piece of equipment is purchased.
(Do not include the $300,000 inventory reduction or the sa1vage value in this computation.)
2) Compute the net present value of the proposed investment in the equipment.
3) Compute the IRR of the proposed investment in the piece of equipment
4) Would you recommend that the piece of equipment be purchased? Explain.
5) Assume that the piece of equipment is purchased. At the end of the first year, the President has found that some items didn't work out as planned. Due to unforeseen problems, software and installation costs were $125,000 more than estimated, and direct labor has been reduced by only 17,500 hours per year, rather than by 20,000 hours. Assuming that aIl other cost data were accurate, does it appear that the company made a wise investment? Show computations, using the net present value format as in (2) above. (Hint: It might be helpful to place yourself back at the beginning of the first year, with the new data.)
6) Upon seeing your analysis in (3) above, the president stated, "That piece of equipment is the worst investment we've ever made. And here we'll be stuck with it for years."
Explain to the president what benefits other than cost savings might accrue from use of the new robot and software.
7) Refer to the original data RECOMPUTE the net present value using a 14% required rate of return. Would it change your decision?
8) Refer to original data: How would your answer change if you had a 30% tax rate? Show computations (Use 12 years straight line for depreciation for the piece of equipment)
In the present environment with the corona virus effect, what would be the additional risk associated in investing in a project ? Name 3 and explain fully how it would affect:
1) Your RRR
2) Your IRR
3) Your NPV