The proposed capital project calls for the Manufacturing Department to fully automate a production facility using one of two different advanced robotics systems. System A will incur development costs of $175,500. System B will cost $650,000 to develop. Both systems will be capitalized and amortized using a CCA rate of 10%. In addition, the firm believes that Net Working Capital will rise by $95,000 at time zero and then by an additional $9,000 at the end of each year for each year that the new system is operating (except at the end of the final year of the project). This applies to both alternatives. However, all of the increase in Net Working Capital will be recovered at the end of the project.If the new automated robotics system is put into use, the pre-tax cost savings each year are estimated as follows:Table 1Year System A System B1 $60,000 $350,0002 $50,000 $220,0003 $50,000 $240,0004 $50,000 $260,0005 $25,000 $280,000 As the financial analyst, you are required to draft a comprehensive memo, addressed to:The Manager, Manufacturing Department, answering the following questions:, the CFO is concerned that a change in technology might make the new system obsolete after 3 years. If this occurs and you only obtain 3 years of cost savings (as per Table 1 above) and no salvage value, which alternative (if any), would you nowrecommend?
The proposed capital project calls for the Manufacturing Department to fully automate a production facility using one of two different advanced robotics systems. System A will incur development costs of $175,500. System B will cost $650,000 to develop. Both systems will be capitalized and amortized using a CCA rate of 10%. In addition, the firm believes that Net Working Capital will rise by $95,000 at time zero and then by an additional $9,000 at the end of each year for each year that the new system is operating (except at the end of the final year of the project). This applies to both alternatives. However, all of the increase in Net Working Capital will be recovered at the end of the project.
If the new automated robotics system is put into use, the pre-tax cost savings each year are estimated as follows:
Table 1
Year System A System B
1 $60,000 $350,000
2 $50,000 $220,000
3 $50,000 $240,000
4 $50,000 $260,000
5 $25,000 $280,000
As the financial analyst, you are required to draft a comprehensive memo, addressed to:
The Manager, Manufacturing Department, answering the following questions:, the CFO is concerned that a change in technology might make the new system obsolete after 3 years. If this occurs and you only obtain 3 years of cost savings (as per Table 1 above) and no salvage value, which alternative (if any), would you now
recommend?
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