A-16 Sensitivity Analysis in Capital Investment Decisions

Square Manufacturing is considering investing in a robotics manufacturing line. Installation of the line will cost an estimated $10.3 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 $7.3 million per year in each of years 4 through 7. After reviewing the use of these systems with the management of other companies, Squares controller has concluded that the operation will most probably result in annual savings of $5.5 million per year for each of years 4 through 7. However, it is entirely possible that the savings could be as low as $3.1 million per year for each of years 4 through 7. The company uses a 18 percent discount rate. Use Exhibit A.8.

Required:

Compute the NPV under the three scenarios. (Round PV factor to 3 decimal places. Enter your answers in thousands of dollars. Negative amounts should be indicated by a minus sign.)

Best Case Expected Worst Case

NET NPV