Advanced Technology, Payback, NPV$,$ IRR, Sensitivity Analysis

Gina Ripley, president of Dearing Company, is considering the purchase of a computer$-$aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows:

Decreased waste$$300,000$Increased quality$400,000$Decrease in operating costs$600,000$Increase in on$-$time deliveries$200,000$

The system will cost $$9,000,000$ and last $10$ years. The company's cost of capital is $12$ percent.

The present value tables provided in Exhibit $19$B$\mathrm{.}1$ and Exhibit $19$B$\mathrm{.}2$ must be used to solve the following problems.

Required:

$1.$ Calculate the payback period for the system.

fill in the blank $1$ years

Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired?

YesNo

$2.$ Calculate the NPV and IRR for the project. Round your IRR answers to the nearest whole percentage value $($for example, $15\mathrm{.}6\%$ rounds to $16\%$ and should be entered as $"16"$ in the answer box$).$ If the NPV is negative, enter your answer as a negative value.

NPV:$fill in the blank $3$IRR:Between$$fill in the blank $4\%$andfill in the blank $5\%$

Should the system be purchased$$even if it does not meet the payback criterion?

YesNo

$3.$ The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of $$1,000,000$ at the end of $10$ years. Second, the increased quality and delivery performance would allow the company to increase its market share by $20$ percent. This would produce an additional annual net benefit of $$300,000.$ Recalculate the payback period, NPV$,$ and IRR given this new information. $($For the IRR computation, initially ignore salvage value.$)$ Round your IRR answers to the nearest whole percentage value $($for example, $15\mathrm{.}6\%$ rounds to $16\%$ and should be entered as $"16"$ in the answer box$).$ If the NPV is negative, enter your answer as a negative value.

Payback period:$$fill in the blank $7$yearsNPV:$fill in the blank $8$IRR:Between$$fill in the blank $9\%$andfill in the blank $10\%$

Does the decision change?

YesNo

Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does the salvage value have any real bearing on the company's decision?

Yes $-$ in this case the decrease in salvage value is enough to change the decisionNo $-$ in this case the decrease in salvage value is not enough to change the decision

$4.$ Select $($and justify$)$ the data analytic types used in Requirement $3.$ See Exhibits $2\mathrm{.}5$ and $2\mathrm{.}6,$ pp$.37$ and $40,$ for a review of data analytic types.

DescriptiveDiagnosticPredictivePrescriptive

$5.$ Suppose that Dearing purchased the new system and that for the first years, the actual net cash flows were $$2,000,000$ per year. What was the actual payback period? Round your answer to the nearest cent.

fill in the blank $14$ years

What data analytic type was used in this case?

DescriptiveDiagnosticPredictivePrescriptive Advanced Technology, Payback, NPV$,$ IRR, Sensitivity Analysis

The system will cost $\backslash (\backslash$$ $9,000,000\backslash )$ and last $10$ years. The company's cost of capital is $12$ percent.

The present value tables provided in Exhibit $19$B$.1$ and Exhibit $19$B$.2$ must be used to solve the following problems.

Required:

$1.$ Calculate the payback period for the system.

years

Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? is negative, enter your answer as a negative value.

Should the system be purchased$-$even if it does not meet the payback criterion? $"16"$ in the answer box$).$ If the NPV is negative, enter your answer as a negative value.

Does the decision change?

Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does the salvage value have any real bearing on the company's decision?

$4.$ Select $($and justify$)$ the data analytic types used in Requirement $3.$ See Exhibits $2\mathrm{.}5$ and $2\mathrm{.}6,$ pp$.37$ and $40,$ for a review of data analytic types. years

What data analytic type was used in this case?