Sensitivity Analysis in Capital Investment Decisions: Automated Manufacturing Corp. is considering investing in a robotics manufacturing line. If the line is installed, it will cost an estimated $1.5 million. This amount must be paid immediately even though construction will take three years to complete (Years 0, I , and 2). Year 3 will be spent testing the production line and, hence, will not yield any positive cash flows. If the operation is very successful, the company expects after-tax cash savings of $1 million per year in each of Years 4 through 7. After reviewing the use of these systems with managements of other companies, the controller of Automated concluded that the operation will most probably result in annual savings of $700,000 per year for each of Years 4 through 7. Further, it was entirely possible that the savings could be as low as $300,000 per year for each of Years 4 through 7.

Required: Complete the following schedule to determine the IRR and NPV at 15 percent under the three scenarios. 

Transcribed Image Text:

Year Best Case ($ ) 01234567 Net present value at 15 percent Internal rate of return Expected Worst Case ($) ($ ) % % %