Monty Company manufactures automobile components for the worldwide market. The c

Question

Monty Company manufactures automobile components for the worldwide market. The company has three large production facilities in Virginia, New Jersey, and California, which have been operating for many years. Brett Harker, vice president of production, believes it is time to upgrade operations by implementing computer-integrated manufacturing (CIM) at one of the plants.

Brett has asked corporate controller Connie Carson to gather information about the costs and benefits of implementing CIM. Carson has gathered the following data:

Monty Company uses a 12% discount rate.

1. Calculate the net present value of Monty’s proposed investment in CIM. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971. Enter negative amounts using a negative sign preceding the number, e.g. -59,991 or parentheses, e.g. (59,991).)

2. Use Excel or a similar spreadsheet application to calculate the internal rate of return on Monty’s proposed investment. (Round internal rate of return to 2 decimal places, e.g. 15.25%.)

3. Andrew Burr, manager of the Virginia plant, has been looking over Carson’s information and believes she has missed some important benefits of implementing CIM. Burr believes that implementing CIM will reduce scrap and rework costs by $214,800 per year. The CIM equipment will take up less floor space in the factory than the old equipment, freeing up 6,000 square feet of space for a planned new research facility. Initial plans called for renting additional space for the new facility, at a cost of $28.64 per square foot. Calculate a revised net present value and internal rate of return using this additional information. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal places, e.g. 58,971. Round internal rate of return to 2 decimal places, e.g. 15.25%.)

Initial equipment cost $ 8,592,000 Working capital required at start-up $ 859,200 Salvage value of existing equipment $ 107,400 Annual operating cost savings $ 1,202,880 Salvage value of new equipment at end of its useful life $ 286,400 Working capital released at end of its useful life $ 859,200 Useful life of equipment 10 years

Explanation / Answer

Net present value is Negative thus it is not advisable to make investment in the CIM. Further IRR is also negative.

Next Question

Outflow Initial Equipment Cost $          8,592,000 Less - Salvage of Existing Plant $ (107,400) Add - Working Capital required at Start Up $ 859,200 (A) Total Outflow in Initial Year $          9,343,800 Inflow Present Value Annuity Factor @12% for 10 Years 5.6502 Annual operating cost saving $          1,202,880 (B) Present value of Annual operating cost saving for 10 years $          6,796,537 Inflow Present Value @12% for 10th Year 0.3220 Salvage value of new equipment at end of its useful life $ 286,400 Working capital released at end of its useful life $ 859,200 (C) Present value of pf Inflows at 10th Year $ 368,883 Net Present Value = B + C - A $        (2,178,380)

Net present value is Negative thus it is not advisable to make investment in the CIM. Further IRR is also negative.

Next Question

Burr's Recommendations Inflow Present Value Annuity Factor @12% for 10 Years                     5.6502 Reduction in Scrap and Rework Cost $              214,800 Saving in Rent of 6000 Sq Ft at $ 28.64 per Sq Ft $              171,840 (D) Present value of pf Inflows at 10th Year $          2,184,601 Revised Net Present Value = B + C + D - A $                   6,221 Net present value is Positive thus it is advisable to make investment in the CIM

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