Square Manufacturing is considering investing in a robotics manufacturing line.

Question

Square Manufacturing is considering investing in a robotics manufacturing line. Installation of the line will cost an estimated $9.1 million. This amount must be paid immediately even though construction will take three years to complete (years 0, 1, and 2). Year 3 will be spent testing the production line and, hence, it will not yield any positive cash flows. If the operation is very successful, the company can expect after-tax cash savings of $6.1 million per year in each of years 4 through 7. After reviewing the use of these systems with the management of other companies, Square’s controller has concluded that the operation will most probably result in annual savings of $4.3 million per year for each of years 4 through 7. However, it is entirely possible that the savings could be as low as $1.9 million per year for each of years 4 through 7. The company uses a 15 percent discount rate. Use Exhibit A.8.

Compute the NPV under the three scenarios. (Round PV factor to 3 decimal places sign.) Best Case Expected Worst Case Net present value

Explanation / Answer

Please note: Since the Exhibit A.8 mentioned in the question is not provided with question posted, kindly confirm with the same prior to submission.

Workings:

Best Case Expected Worst Case Net present value $ 2349700 -1028900 -5533700

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