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Compute the NPV of the project by using the original savings and investment figures. Calculate by using discount rates of 14% and 20%. Include salvage
Compute the NPV of the project by using the original savings and investment figures. Calculate by using discount rates of 14% and 20%. Include salvage value in computation.
OBJECTIVE Calculate CONCE decision 4. automated plant." completely OBJECTIVE Problem 14 Newmarge its manufact production estimated at software, an The new sys produce old system disposing of Required: 1. Comp 2. One y noted has an Problem 14-45 Capital Investment, Advanced "I know that it's the thing to do, insisted Pamela Kincaid, manager of finance for Colgate Manufacturing. "If we are "I'm not so sure," replied Bill Thomas, CEO of Colgate "The savings from labour reductions and increased productivity are only R40 million per year. The price tag pment) Manufacturing Environment going to be competitive, we need to build this . ve cash ation. for this factory and it's a small one is R450 million. That gives a payback period of more than 11 years. That's a long time to put the company's money at risk." "Yeah, but you're overlooking the savings that we'll get ject. from the increase in quality," interjected John Simpson, expected production manager. "With this system, we can decrease our waste and our rework time significantly. Those savings are unt rate worth another million rands per year." ate and "Another million will only cut the payback to about 9 years," retorted Bill. "Ron, you're the marketing manager should ake this do you have any insights?" "Well, there are other factors to consider, such as on the service quality and market share. I think that increasing effects. our product quality and improving our delivery service will make us a lot more competitive. I know for a fact that two of our competitors have decided against automation alue That'll give us a shot at their customers, provided our artment product is of higher quality and we can deliver it faster. I He cycle estimate that it'll increase our net cash benefits by another f a new R24 million." lay. The "Wow! Now that's impressive." Bill exclaimed, nearly nds and convinced. "The payback is now getting down to a reasonable mds will level." the end "I agree," said Pamela, "but we do need to be sure that it's at the a sound investment. I know that estimates for construction ctation of the facility have gone as high as R480 million. I also know at the that the expected residual value, after the 20 years of service er each we expect to get, is R50 million. I think I had better see if this stment project can cover our 14% cost of capital." mpany "Now wait a minute, Pamela" Bill demanded. You cash know that I usually insist on a 20% rate of return, especially acquir due to saving labou chang as ift the cc 3. CON result respo indic: year sensi the a 4. CON bene OBJECT for a project of this magnitude." Probler Manufa Patterso
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