Home Catering Inc Case The following comments came from Robert Dillon production manager of Home Catering Inc maker of catering supplies for the Catering industry. "If we can get that new robot to combine with our other automated equipment, we'lI have a complete flexible manufacturing system in place in our factory plant," . "Let's just hope that reduced labor and inventory costs can justify its acquisition," replied Martha Wayne, the controller. "Otherwise, we'll never get it. You know how the president feels about equipment paying for itself out of reduced costs." The cost of the robot is $1.6 million and its useful life will be 12 years. It is estimated that annual saving in inventory carrying costs is $190 000, however the monthly increase in power and maintenance costs will be $2500. The company will need to invest in software and installation of the robot a total of $700 000. The salvage value of the robot in 12 years will be $90 000. The following data were provided to help us make the right decision relating to the robot. 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) Determine the net annual cost savings if the robot is purchased. (Do not include the $300,000 inventory reduction or the sa1vage value in this computation.) Compute the net present value of the proposed investment in the robot. Would you recommend that the robot be purchased? Explain. 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.). 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." A) Explain to the president what benefits other than cost savings might accrue from use of the new robot and software. B) Compute for the President the dollar amount of cash inflow that would be needed each year from the benefits in 1) above in order for the equipment to yield a 20% rate of return. PART II (20 points) Going back to part I : How would your answer change if you had a 30% tax rate? Show computations (Use 12 years straight line for depreciation for robot and software) PART III (20 points) Compute the IRR of the project for Part I, Part II and Part III. Comment on your finding.

I need the answer to part 2 and part 3.