Furlong Manufacturing is considering investing in a robotics manufacturing process. Purchase and installation of the process will

Question:

Furlong Manufacturing is considering investing in a robotics manufacturing process. Purchase and installation of the process will cost an estimated $2,900,000. This amount must be paid immediately.

The company expects to dismantle this production process at the end of its seven-year life and salvage the equipment for $100,000. Furlong will depreciate the process equipment at $400,000 per year.

Starting in year 4, the company expects significant quality improvements valued at $2.1 million until the end of the process in year 7. Because this investment is risky, the company believes it should use an 18 percent discount rate. The company’s effective tax rate is 35 percent.

Required

a. Compute the net present value of this investment.

b. Is this a routine or strategic investment? Explain.

c. What is your evaluation of the way this company models risk?

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Jacob Charles

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