NC 4. decision lue. s of ent) app this computation. OBJECTIVE 16 Problem 14.45 Capital Investment, Advanced Manufacturing Environment OBJECTIVE Problem 14 Newmarge 1 its manufact production estimated at software, ar The new sy produce cas cash old system disposing o Required: 1. Comp 2. One y noted acquil and San manager of finance for Colgate Manufacturing. "If we are "I know that it's the thing to do," insisted Pamela Kincaid, going to be competitive, we need to build this completely know that I usually insist on a 20% rate of return, especially automated plant." "I'm not so sure," replied Bill Thomas, CEO of Colgate, The savings from labour reductions and increased productivity are only R40 million per year. The price tag for this factory and it's a small one-is R450 million. That -n. gives a payback period of more than 11 years. That's a long time to put the company's money at risk." "Yeah, but you're overlooking the savings that we'll get from the increase in quality, interjected John Simpson, production manager. With this system, we can decrease our cted waste and our rework time significantly. Those savings are rate worth another million rands per year." "Another million will only cut the payback to about 9 years," retorted Bill. Ron, you're the marketing manager- buld do you have any insights?" this -Well, there are other factors to consider, such as the service quality and market share. I think that increasing ects. our product quality and improving our delivery service will make us a lot more competitive. I know for a fact that two of our competitors have decided against automation That'll give us a shot at their customers, provided our nent product is of higher quality and we can deliver it faster. I ycle. estimate that it'll increase our net cash benefits by another R24 million." The "Wow! Now that's impressive," Bill exclaimed, nearly and convinced. "The payback is now getting down to a reasonable will level." end "I agree," said Pamela, "but we do need to be sure that it's t the a sound investment. I know that estimates for construction of the facility have gone as high as R480 million. I also know t the that the expected residual value, after the 20 years of service each we expect to get, is R50 million. I think I had better see if this ment project can cover our 14% cost of capital." pany Now wait a minute, Pamela, Bill demanded. "You cash for a project of this magnitude." due tc saving labou chang as if t the cc 3. CON result respo indic year sensi the a new 4. CON bene ation OBJECT Problem Manufa Patterso Chapter 14 Capital Inves e S equipm (CAM) cash flo Ye Required: 1. Compute the NPV of the project by using the original savings and investment figures. Calculate by using discount rates of 14% and 20%. Include salvage value in the computation. 2. Compute the NPV of the project using the additional benefits noted by the production and marketing managers. Also, use the original cost estimate of R450 million. Again, calculate for both possible discount rates. 3. Compute the NPV of the project using all estimates of cash flows, including the possible initial outlay of R480 million. Calculate by using discount rates of 14% and 20%. 4. CONCEPTUAL CONNECTION If you were making the you do? Explain. decision, what would NC 4. decision lue. s of ent) app this computation. OBJECTIVE 16 Problem 14.45 Capital Investment, Advanced Manufacturing Environment OBJECTIVE Problem 14 Newmarge 1 its manufact production estimated at software, ar The new sy produce cas cash old system disposing o Required: 1. Comp 2. One y noted acquil and San manager of finance for Colgate Manufacturing. "If we are "I know that it's the thing to do," insisted Pamela Kincaid, going to be competitive, we need to build this completely know that I usually insist on a 20% rate of return, especially automated plant." "I'm not so sure," replied Bill Thomas, CEO of Colgate, The savings from labour reductions and increased productivity are only R40 million per year. The price tag for this factory and it's a small one-is R450 million. That -n. gives a payback period of more than 11 years. That's a long time to put the company's money at risk." "Yeah, but you're overlooking the savings that we'll get from the increase in quality, interjected John Simpson, production manager. With this system, we can decrease our cted waste and our rework time significantly. Those savings are rate worth another million rands per year." "Another million will only cut the payback to about 9 years," retorted Bill. Ron, you're the marketing manager- buld do you have any insights?" this -Well, there are other factors to consider, such as the service quality and market share. I think that increasing ects. our product quality and improving our delivery service will make us a lot more competitive. I know for a fact that two of our competitors have decided against automation That'll give us a shot at their customers, provided our nent product is of higher quality and we can deliver it faster. I ycle. estimate that it'll increase our net cash benefits by another R24 million." The "Wow! Now that's impressive," Bill exclaimed, nearly and convinced. "The payback is now getting down to a reasonable will level." end "I agree," said Pamela, "but we do need to be sure that it's t the a sound investment. I know that estimates for construction of the facility have gone as high as R480 million. I also know t the that the expected residual value, after the 20 years of service each we expect to get, is R50 million. I think I had better see if this ment project can cover our 14% cost of capital." pany Now wait a minute, Pamela, Bill demanded. "You cash for a project of this magnitude." due tc saving labou chang as if t the cc 3. CON result respo indic year sensi the a new 4. CON bene ation OBJECT Problem Manufa Patterso