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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: $3,900,000 $780,000 $290,000 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 14 years Useful life $2,500 $88,000 14 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 $15 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 $430,000. 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 10%. (Ignore income taxes.) Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor(s) using tables. 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 10% 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 1-14 1 14 2b. Based on these data, would you recommend that the robot be purchased? Yes
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