Aswega AS is an Estonian manufacturer of electromagnetic flowmeters, heat meters and calibration equipment located in Tallinn. Suppose that it is considering the installation of a computer-aided design/computer-aided manufacturing (CAD/CAM) system. The current proposal calls for implementation of only the CAD portion of the system. The manager in charge of production design and planning has estimated that the CAD portion of CAD/CAM could do the work of five designers, who are each paid EEK 500,000 per year (52 weeks × 40 hours × EEK 250 per hour), where EEK is the symbol for the Estonian kroon.

Aswega can purchase the CAD/CAM system for EEK 2.8 million. (It cannot purchase the CAD portion separately.) The annual out-of-pocket costs of running the CAD portion of the system are EEK 1.8 million. The company expects to use the system for 8 years. The company’s minimum desired rate of return is 12 per cent. Ignore income taxes.

1. Compute the NPV of the investment in the CAD/CAM system. Should Aswega purchase the system? Explain.

2. Suppose the manager was not certain about her predictions of savings and economic life.

Possibly the company will replace only four designers, but if everything works out well, it may replace as many as six. If better systems become available, the company may use the CAD/CAM system for only 5 years, but it might last as long as 10 years. Prepare pessimistic, most likely, and optimistic predictions of NPV. Would this analysis make you more confident or less confident in your decision in number 1? Explain.

3. What subjective factors might influence your decision?