An assembly operation at a software company now requires $250,000 per year in labor costs. A robot can be purchased and installed to automate the operation. The robot will cost $800,000, have an economic life of ten years, and have no residual value at the end of its life. Maintenance and operating expenses of $64,000 per year for the robot are estimated. MARR is 15%. Determine whether this is a viable project. Solve the problem by: (a) Present worth analysis (b) Annual cash flow analysis+- (c) Rate of return analysis

An assembly operation at a software company now requires $250,000 per year in labor costs. A robot can be purchased and installed to automate the operation. The robot will cost $800,000, have an economic life of ten years, and have no residual value at the end of its life. Maintenance and operating expenses of $64,000 per year for the robot are estimated. MARR is 15%. Determine whether this is a viable project. Solve the problem by: (a) Present worth analysis (b) Annual cash flow analysis+- (c) Rate of return analysis

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Description: An assembly operation at a software company now requires $250,000 per year in labor costs. Arobot can be purchased and installed to automate the operation. The robot will cost $800,000,have an economic life of ten years, and have no residual value a

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 28P: Friedman Company is considering installing a new IT system. The cost of the new system is estimated...

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Friedman Company is considering installing a new IT system. The cost of the new system is estimated to be 2,250,000, but it would produce after-tax savings of 450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving 450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 12 percent. Required: 1. Calculate the projects internal rate of return. Should the company acquire the new IT system? 2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. Comment on the safety margin that exists, if any. 3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Comment on the usefulness of this information.
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