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 Installation and software $1,850,000 $ 435,000 $ 228,000 48,000 77,000 Annual savings in inventory carrying costs Annual increase in power and maintenance costs $ Salvage value in 5 years Useful life $ 5 years Engineering studies suggest that use of the robot will result in a savings of 29,000 direct labor-hours each year. The labor rate is $15 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 $418,000. 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 17% required rate of return. Click here to view Exhibit 14B-1 and Exhibit 14B-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 $418,000 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?
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 Installation and software $1,850,000 $ 435,000 $ 228,000 48,000 77,000 Annual savings in inventory carrying costs Annual increase in power and maintenance costs $ Salvage value in 5 years Useful life $ 5 years Engineering studies suggest that use of the robot will result in a savings of 29,000 direct labor-hours each year. The labor rate is $15 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 $418,000. 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 17% required rate of return. Click here to view Exhibit 14B-1 and Exhibit 14B-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 $418,000 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?
Financial And Managerial Accounting
15th Edition
ISBN:9781337902663
Author:WARREN, Carl S.
Publisher:WARREN, Carl S.
Chapter26: Capital Investment Analysis
Section: Chapter Questions
Problem 5MAD: Home Garden Inc. is considering the construction of a distribution warehouse in West Virginia to...
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