Hearld Manufacturing is considering investing in a robotics manufacturing line. Installation of the line will cost...

Transcribed Image Text:

Hearld Manufacturing is considering investing in a robotics manufacturing line. Installation of the line will cost an estimated $3 million. This amount must be paid immediately even though construction will take three years to complete (years 0, 1, and 2). Year 3 will be spent testing the production line and, hence, will not yield any positive cash flows. If the operation is very successful, the company expects after-tax cash savings of $2 million per year in each of years 4 through 7. After reviewing the use of these systems with managements of other companies, Hearld's controller concluded that the operation will most probably result in an- nual savings of $1,400,000 per year for each of years 4 through 7. Further, it is entirely possible that the savings could be as low as $600,000 per year for each of years 4 through 7. Compute the IRR and NPV under the three scenarios (use 16 percent for the NPV calcu- lation). A company with limited investment funds and a 20 percent cost of capital must choose from among three competing capital investment projects with the following cash flow patterns (in thousands): Hearld Manufacturing is considering investing in a robotics manufacturing line. Installation of the line will cost an estimated $3 million. This amount must be paid immediately even though construction will take three years to complete (years 0, 1, and 2). Year 3 will be spent testing the production line and, hence, will not yield any positive cash flows. If the operation is very successful, the company expects after-tax cash savings of $2 million per year in each of years 4 through 7. After reviewing the use of these systems with managements of other companies, Hearld's controller concluded that the operation will most probably result in an- nual savings of $1,400,000 per year for each of years 4 through 7. Further, it is entirely possible that the savings could be as low as $600,000 per year for each of years 4 through 7. Compute the IRR and NPV under the three scenarios (use 16 percent for the NPV calcu- lation). A company with limited investment funds and a 20 percent cost of capital must choose from among three competing capital investment projects with the following cash flow patterns (in thousands):