A-14 Sensitivity Analysis in Capital Investment Decisions

Square Manufacturing is considering investing in a robotics manufacturing line. Installation of the line will cost an estimated $10.4 million. This amount must be paid immediately even though construction will take three years to complete (years 0, 1, and 2). Year 3 will be spent testing the production line and, hence, it will not yield any positive cash flows. If the operation is very successful, the company can expect after-tax cash savings of $7.4 million per year in each of years 4 through 7. After reviewing the use of these systems with the management of other companies, Square