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Engineering studies suggest that use of the robot will result in a savings of 20,000 direct labor hours each year. The labor rate is $16
Engineering studies suggest that use of the robot will result in a savings of 20,000 direct labor hours each year. The labor rate is $16 per hour. Also, the smoother work flow made possible by the installation will allow the company to reduce the amount of inventory on hand by $300,000. The released funds will be available for use elsewhere in the company. This inventory reduction will take place in the first year of operation. The company requires a 20% return on all investments in automated equipment. (Ignore income taxes in 1) to 4) 1) Determine the net annual cost savings if the robot is purchased. (Do not include the $300,000 inventory reduction or the salvage value in this computation.) 2) Compute the net present value of the proposed investment in the robot. Would you recommend that the robot be purchased? Explain. 3) Assume that the robot is purchased. At the end of the first year, Martha Wayne found that some items didn't work out as planned. Due to unforeseen problems, software and installation costs were $125,000 more than estimated, and direct labor has been reduced by only 17,500 hours per year, rather than by 20,000 hours. Assuming that aIl other cost data were accurate, does it appear that the company. made a wise investment? Show computations, using the net present value format as in (2) above.). 4) Upon seeing your analysis in (3) above, the president stated, "That robot is the worst investment we've ever made. And here we'll be stuck with it for years
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