Problem 7-30 (Algo) Net Present Value Analysis; Uncertain Future Cash Flows; Postaudit [LO7-2, LO7-4]

Saxon Products, Incorporated, is investigating the purchase of a robot for use on the companys assembly line. Selected data relating to the robot are provided below:

Cost of the robot	$ 1,500,000
Installation and software	$ 400,000
Annual savings in inventory carrying costs	$ 221,000
Annual increase in power and maintenance costs	$ 41,000
Salvage value in 5 years	$ 70,000
Useful life	5	years

In addition to the data above, engineering studies suggest that use of the robot will result in a savings of 22,000 direct labor-hours each year. The labor rate is $16 per hour. Also, the smoother work flow made possible by the use of automation will allow the company to reduce the amount of inventory on hand by $411,000. This inventory reduction will take place at the end of the first year of operation; the released funds will be available for use elsewhere in the company. Saxon Products has a 20% required rate of return.

Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using tables.

Required:

1. Determine the annual net cost savings if the robot is purchased. (Do not include the $411,000 inventory reduction or the salvage value in this computation.)

2-a. Compute the net present value of the proposed investment in the robot.

2-b. Based on these data, would you recommend that the robot be purchased?

3-a. Assume that the robot is purchased. However, due to unforeseen problems, software and installation costs were $86,000 more than estimated and direct labor could only be reduced by 18,000 hours per year, rather than the original estimate of 22,000 hours. Assuming that all other cost data is accurate, what would a postaudit suggest is the actual net present value of this investment?

3-b. Does it appear that the company made a wise investment?

4-a. Which of the following are intangible benefits associated with the new automated equipment?

4-b. Based on your analysis in Requirement 3 above, compute for the president the minimum dollar amount of annual cash inflow that would be needed from the benefits in part 4(a) for the automated equipment to yield a 20% rate of return.