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If we can get that new robot to combine with our other automated equipment, we'll have a complete flexible manufacturing system (FMS) in place in
"If we can get that new robot to combine with our other automated equipment, we'll have a complete flexible manufacturing system (FMS) in place in our Northridge plant," said Hal Swain, production manager for Diller Products. "Let's just hope that reduced labor and inventory costs can justify its acquisition," replied Linda Wycoff, the controller. "Otherwise, we'll never get it. You know how the president feels about equipment paying for itself out of reduced costs." Selected data relating to the robot are provided below: $2,800,000 $420,000 $350,000 Cost of the robot Software and installation Annual savings in labor costs Annual savings in inventory carrying costs Monthly increase in power and maintenance costs Salvage value in 8 years Useful life $1,500 $93,000 8 years 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 $13 per hour. Also, the smoother work flow made possible by the FMS will allow the company to reduce the amount of inventory on hand by $330,000. 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's required rate of return is 14%. (Ignore income taxes.) Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor(s) using tables. Renuired. Required: 1. Determine the net annual cost savings if the robot is purchased. (Do not include the $330,000 inventory reduction or the salvage value in this computation.) Savings in labor costs Savings in inventory carrying costs Total Less increased power and maintenance cost Annual net cost savings 2a.Compute the net present value of the proposed investment in the robot. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.) Year(s) Amount of Cash Flows Present Value 14% Factor of Cash Flows Now Now Cost of the robot Software and installation Cash released from inventory Annual net cost savings 2a.Compute the net present value of the proposed investment in the robot. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.) Year(s) Amount of Cash Flows 14% Factor Present Value of Cash Flows Now Now Cost of the robot Software and installation Cash released from inventory Annual net cost savings Salvage value Net present value $ 2b.Based on these data, would you recommend that the robot be purchased? No Yes 3a. Assume that the robot is purchased. At the end of the first year, Linda Wycoff has found that some items didn't work out as planned. Due to unforeseen problems, software and installation costs were $165,000 more than estimated, and direct labor has been reduced by only 17,500 hours per year, rather than by 20,000 hours. Assuming that all other cost data were accurate, determine the net present value of the project. (Hint: It might be helpful to place yourself back at the beginning of the first year, with the new data.) (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.) Year(s) Amount of Cash Flows 14% Factor Present Value 14% Factor of Cash Flows Now Now Cost of the robot Software and installation Cash released from inventory Annual net cost savings Salvage value Net present value $ 0 3b.Does it appear that the company made a wise investment? Yes 4a.Intangible benefits other than cost accruing of new robot and FMS. (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.) ? Reduction in inventories. ? Greater throughput. Increase in inventories. Greater variety of products. Higher quality. ? Reduced cost per unit of raw material. 4b.Based on your analysis in Requirement 3 above, compute for the president the dollar amount of cash inflow that would be needed each year from the benefits in (a) above in order for the equipment to yield a 14% rate of return. (Round discount factor to 3 decimal places.) Cash Inflow 4b.Based on your analysis in Requirement 3 above, compute for the president the dollar amount of cash inflow that would be needed each year from the benefits in (a) above in order for the equipment to yield a 14% rate of return. (Round discount factor to 3 decimal places.) Cash Inflow 1 Choose Denominator: Choose Numerator: Cash inflow Cash inflow
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