Gina Ripley, president of Dearing Company, is considering the purchase of a computeraided manufacturing system. The annual after-tax cash benefits/savings associated with the system are described below:

The system will cost $9,000,000 and will last 10 years. The company's cost of capital is 12%.
Required:
1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of 5 years or less. Would the system be acquired?
2. Calculate the NPV and IRR for the project. Should the system be purchased—even if it does not meet the payback criterion?
3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of $1,000,000 at the end of 10 years. Second, the increased quality and delivery perfor¬
mance would allow the company to increase its market share by 20%. This would pro¬
duce an additional annual after-tax benefit of $300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the company's decision?

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Decreased waste Increased quality Decrease in operating costs Increase in on-time deliveries $300,000 400,000 600,000 200,000