Glentech Manufacturing is considering the purchases of an automated parts handler for the assembly and test area of its Phoenix, Arizona, plant. The handler will costs $250,000 to purchase plus $10,000 for installation and employee training. If the company undertakes the investment, it will automate a part of the semiconductor test area and reduce operating costs by $70,000 per year for the next 10 years. However, five years into the investment?s life, Glentech will have to spend an additional $100,000 to update and refurbish the handler.The investment in the handler will be depreciated using straight-line depreciation over 10-years, and the refurbishing costs will be depreciated over the remaining five-year life of the handler (also using straight-line depreciation). In 10 years, the handler is expected to be worth $5,000 although its book value will be zero. Glentech?s tax rate is 30%, and its opportunity cost of capital is 12%. a) Is the project good for Glentech? Why or why not? b)What can we tell about the project from the NPV profile? c)If the project were partially financed by borrowing, how would this affect the investment cash flows? How would borrowing a portion of the investment outlay affect the value of the investment to the firm? d)The project calls for two investments: one immediately and one at the end of Year 5. How much would Glentech earn on its investment, and how should we account for the additional investment outlay in our calculations? e)What are the considerations that make this investment somewhat risky, and how would you investigate the potential risks of this investment?

PROBLEM 2-8 Given Cost of Tester Installation and training costs CAPEX (Year 5) Salvage value Depreciation Project Life Tax rate Cost of Capital Solution Legend $250,000 $10,000 $100,000 $5,000 Straight Line 10 years 30% 12% = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Exhibit P2-8.1 0 Investment Outlays Equipment purchases Installation costs Initial Outlay After-tax salvage value Free Cash Flows Operating Expense Savings Less: Depreciation Expense Additional Operating Income Less: Taxes NOPAT Plus: Depreciation Less: CAPEX Free Cash Flow 1 2 3 Year 5 4 $(250,000) (10,000) $(260,000) 6 7 8 9 $(100,000) 3,500 (260,000) $(260,000) 70,000 (26,000) $44,000 (13,200) $30,800 26,000 $56,800 70,000 (26,000) $44,000 (13,200) $30,800 26,000 $56,800 70,000 (26,000) $44,000 (13,200) $30,800 26,000 $56,800 70,000 (26,000) $44,000 (13,200) $30,800 26,000 $56,800 70,000 (26,000) $44,000 (13,200) $30,800 26,000 (100,000) $(43,200) 70,000 (46,000) $24,000 (7,200) $16,800 46,000 $62,800 70,000 (46,000) $24,000 (7,200) $16,800 46,000 $62,800 70,000 (46,000) $24,000 (7,200) $16,800 46,000 $62,800 Net Present Value Internal Rate of Return NPV Profile Discount Rates 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30% 32% 34% 36% 38% 40% a. b. c. d. e. 10 NPV 241,500 188,124 142,825 104,168 71,000 42,391 17,590 (4,019) (22,937) (39,577) (54,279) (67,327) (78,955) (89,362) (98,711) (107,144) (114,777) (121,710) (128,030) (133,810) (139,111) NPV Profile 12 Net Present Value 10 8 6 4 2 0 0 2 4 6 Discount Rates 8 10 12 70,000 (46,000) $24,000 (7,200) $16,800 46,000 $62,800 70,000 (46,000) $24,000 (7,200) $16,800 46,000 $66,300