QUALITY, MARKET SHARE, AUTOMATED MANUFACTURING ENVIRONMENT A company is considering two competing investments. The first is for
Question:
QUALITY, MARKET SHARE, AUTOMATED MANUFACTURING ENVIRONMENT A company is considering two competing investments. The first is for a standard piece of production equipment; the second is for computer-aided manufacturing (CAM) equipment. The investment and after-tax operating cash flows follow:
Year Standard Equipment CAM Equipment 0 $(500,000) $(2,000,000)
1 300,000 100,000 2 200,000 200,000 3 100,000 300,000 4 100,000 400,000 5 100,000 400,000 6 100,000 400,000 7 100,000 500,000 8 100,000 1,000,000 9 100,000 1,000,000 10 100,000 1,000,000 Assume that the company’s cost of capital is 14 percent.
Required:
. Calculate the NPV of each alternative by using the 14 percent rate.
. Now assume that if the standard equipment is purchased, the competitive position of the firm will deteriorate because of lower quality (relative to competitors who did automate). Marketing estimates that the loss in market share will decrease the projected net cash inflows by 50 percent for years 3 through 10.
Recalculate the NPV of the standard equipment given this outcome. What is the decision now? Discuss the importance of assessing the effect of intangible benefits.
Step by Step Answer:
Cornerstones Of Financial Accounting Current Trends Update
ISBN: 9781111527952
1st Edition
Authors: Jay Rich , Jeff Jones, Maryanne Mowen , Don Hansen