(11-68) Investment in CAD/CAM

Aswega AS is an Estonian manufacturer of electromagnetic flowmeters, heatmeters, 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 weeks40 hoursEEK 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

companys minimum desired rate of return is 12%. Ignore income taxed.

(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 saving 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 so 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?