Postaudit, Sensitivity Analysis

For discount factors use Exhibit 14B-1 and Exhibit 14B-2. - THEY ARE ATTACHED BELOW!

Newmarge Products, Inc., is evaluating a new design for one of its manufacturing processes. The new design will eliminate the production of a toxic solid residue. The initial cost of the system is estimated at $860,000 and includes computerized equipment, software, and installation. There is no expected salvage value. The new system has a useful life of 8 years and is projected to produce cash operating savings of $225,000 per year over the old system (reducing labor costs and costs of processing and disposing of toxic waste). The cost of capital is 16%.

Required:

1. Compute the NPV of the new system. Round present value calculations and final NPV to the nearest dollar. $ __________

2. One year after implementation, the internal audit staff noted the following about the new system: (1) the cost of acquiring the system was $60,000 more than expected due to higher installation costs, and (2) the annual cost savings were $20,000 less than expected because more labor cost was needed than anticipated. Using the changes in expected costs and benefits, compute the NPV as if this information had been available 1 year ago. Round present value calculations and final NPV to the nearest dollar. Use the minus sign to indicate a negative NPV. $ __________