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 19B.1 and Exhibit 19B.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?

YesNoNo

2. Calculate the NPV and IRR for the project. Round your IRR answers to the nearest whole percentage value (for example, 15.6% 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	%	and	fill in the blank 5	%

Should the system be purchasedeven if it does not meet the payback criterion?

YesNoNo

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, 15.6% 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	years
NPV:	$fill in the blank 8
IRR:	Between fill in the blank 9	%	and	fill in the blank 10	%

Does the decision change?

YesNoYes

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 2.5 and 2.6, pp. 37 and 40, for a review of data analytic types.

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?