Problem 9-25 Culver Company manufactures automobile components for the worldwide

Question

Problem 9-25 Culver 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, belleves 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: Inital equipment cost Working capital required at start-up Salvage value of existing equipment Annual operating cost savings Salvage value of new equipment at end of its useful life 289,600 Working capital released at end of its useful life Useful life of equipment $8,688,000 $ 868,800 $ 108,600 $1,216,320 $ 868,800 10 years Culver Company uses a 12% discount rate. here to view the factor table Calculate the net present value of Culver'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).) Net present e $ LINK TO TEXT LINK TO VIDEO Use Excel or a similar spreadsheet application to calculate the internal rate of return on Culver's proposed investment. (Round internal rate of return to 2 decimal places, e.g. 15.25%.) Internal rate of return LINK TO TEXT LINK TO VIDEO Andrew Burr, manager of the Virginla 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 $217,200 per year. The CIM equipment wl 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 $28.96 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 decimai places, e.g. 58,971. Round internal rate of return to 2 decimal places, e.g. 15.25%.) Net present value $ internal rate of return Does your recommendation change as a result of this new information? Click if you would like to Show Work for this question: Open Show Work

Explanation / Answer

Cash flow during the years:

Year 0: -8688000-868800+108600 = -9448200

Year 1 to 9: 1216320

Year 10: 1216320+289600+868800 = 237420

NPV = -9448200 + 1216320/1.12 + 1216320/1.12^2 +++++++ 2374720/1.12^10 = -2202747

IRR can be calculated in excel

= IRR (series of cash flows)

= 6.31%

B)

Cash flow during the years:

Year 0: -8688000-868800+108600 = -9448200

Year 1 to 9: 1216320 + 217200 + 6000*28.96 = 1607280

Year 10: 1216320+289600+868800 + 217200 + 6000*28.96 = 2765680

NPV = -9448200 + 1607280/1.12 + 1607280/1.12^2 +++++++ 2765680/1.12^10 = 6264

IRR can be calculated in excel

= IRR (series of cash flows)

= 12.02%

Since, IRR is greater than cost of capital and npv is positive, the project should be chosen. And hence the recommendation is changed from non acceptance to acceptance.

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