Saxon Products, Inc., is investigating the purchase of a robot for use on the company's assembly line. Selected data relating to the robot are provided below: Cost of the robot Installation and software $1,850,000 $ 435,000 $ 228,000 48,000 77,000 Annual savings in inventory carrying costs Annual increase in power and maintenance costs $ Salvage value in 5 years Useful life $ 5 years Engineering studies suggest that use of the robot will result in a savings of 29,000 direct labor-hours each year. The labor rate is $15 per hour. Also, the smoother work flow made possible by the use of automation will allow the company to reduce the amount of inventory on hand by $418,000. This inventory reduction will take place at the end of the first year of operation; the released funds will be available for use elsewhere in the company. Saxon Products has a 17% required rate of return. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables. Required: 1. Determine the annual net cost savings if the robot is purchased. (Do not include the $418,000 inventory reduction or the salvage value in this computation.) 2-a. Compute the net present value of the proposed investment in the robot. 2-b. Based on these data, would you recommend that the robot be purchased?
Saxon Products, Inc., is investigating the purchase of a robot for use on the company's assembly line. Selected data relating to the robot are provided below: Cost of the robot Installation and software $1,850,000 $ 435,000 $ 228,000 48,000 77,000 Annual savings in inventory carrying costs Annual increase in power and maintenance costs $ Salvage value in 5 years Useful life $ 5 years Engineering studies suggest that use of the robot will result in a savings of 29,000 direct labor-hours each year. The labor rate is $15 per hour. Also, the smoother work flow made possible by the use of automation will allow the company to reduce the amount of inventory on hand by $418,000. This inventory reduction will take place at the end of the first year of operation; the released funds will be available for use elsewhere in the company. Saxon Products has a 17% required rate of return. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables. Required: 1. Determine the annual net cost savings if the robot is purchased. (Do not include the $418,000 inventory reduction or the salvage value in this computation.) 2-a. Compute the net present value of the proposed investment in the robot. 2-b. Based on these data, would you recommend that the robot be purchased?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Saxon Products, Inc., is investigating the purchase of a robot for use on the company's assembly line. Selected data relating
to the robot are provided below:
Cost of the robot
Installation and software
Annual savings in inventory carrying costs
Annual increase in power and maintenance costs $
Salvage value in 5 years
Useful life
$
Engineering studies suggest that use of the robot will result in a savings of 29,000 direct labor-hours each year. The labor
rate is $15 per hour. Also, the smoother work flow made possible by the use of automation will allow the company to reduce
the amount of inventory on hand by $418,000. This inventory reduction will take place at the end of the first year of
operation; the released funds will be available for use elsewhere in the company. Saxon Products has a 17% required rate of
return.
Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. Determine the annual net cost savings if the robot is purchased. (Do not include the $418,000 inventory reduction or the
salvage value in this computation.)
2-a. Compute the net present value of the proposed investment in the robot.
2-b. Based on these data, would you recommend that the robot be purchased?
3-a. Assume that the robot is purchased. However, due to unforeseen problems, software and installation costs were
$93,000 more than estimated and direct labor could only be reduced by 22,000 hours per year, rather than the original
estimate of 29,000 hours. Assuming that all other cost data is accurate, what would a postaudit suggest is the actual net
present value of this investment?
$1,850,000
$ 435,000
$ 228,000
48,000
77,000
3-b. Does it appear that the company made a wise investment?
4-a. Which of the following are intangible benefits associated with the new automated equipment?
4-b. Based on your analysis in Requirement 3 above, compute for the president the minimum dollar amount of annual cash
inflow that would be needed from the benefits in part 4(a) for the automated equipment to yield a 17% rate of return.
Req 1
Complete this question by entering your answers in the tabs below.
Req 2A
Req 2B
5 years
Req 3A
< Req 1
Req 3B
Req 4A
Determine the annual net cost savings if the robot is purchased. (Do not include the $418,000 inventory reduction or the
salvage value in this computation.)
Annual net cost savings
Req 4B
Req 2A
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