The Spieth Golf Company is considering the addition of a computerized robot to i

Question

The Spieth Golf Company is considering the addition of a computerized robot to its equipment. The initial cost of the equipment is $1,000,000, and the robot is expected to have a useful life of five years and $200,000 salvage value. The cost savings and increased capacity attributable to the machine are estimated to generate increases in the firm's annual cash inflows (before considering depreciation) of $400,000.

Spieth has a weighted average cost of capital of 10%. Its marginal cost of capital is 12% .

Based on the information above provide appropriate quantitative analysis to support your answers to the following

A. What is the net present value, NPV, of the investment?

B. Should the robot be acquired by the firm?

C. What is the estimated Internal Rate of Return, IRR, on this proposed investment?

Explanation / Answer

As the project has positive NPC of 640200 it should be accepted.

31.39%

# Apply this formula of IRR in Excel Sheet

Calculation of NPV year Cash flows    PVF @ 10%    PV 0 -1000000 1 -1000000 1 400000 0.909 363600 2 400000 0.826 330400 3 400000 0.751 300400 4 400000 0.683 273200 5 600000 0.621 372600 640200

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