Robinson and Marx Manufacturing Crop (RMM) is a medium sized manufacturing company. RMM is faced with a decision regarding the automation of theirmanufacturing process. Since inception, the company has used a labor intensive manufacturing process for the manufacture of its high-end diaries and journals. They have benefitted form the large immigrant population in New York and their excellent work ethic. Employees are not unionized and relationships between management and the work force have been good.

RMM management believe that is is because of this personal touch that their products have a hand crafted, ageless appearance and has made the journals and diaries a best seller in Eurpope and Canada with potential to expand to other markets. In the last few years, RMM has felt the impactof the economy. Recently, more more competition has also entered the high end market and RMM has experienced downward pressure on prices and margins.

At a recent recent trade show, an Italian manufacturer of specialized printing suggest they can automate their process. Automation, although costly, would result in substantial saving in labor costs and other benefits.

RMM's CEO, Robinson, is of the opinion that this is something that the company will need to do to stay competitive.The CEO has gathered data relating to the machinery. Engineering studies provided suggest that use of the new machinery will result in a saving of 20,000 direct labor hours each year. The labor rate including fringe benefits, is $16 per hour. However, specialized machinery will require sophisticated operators and the initial upfront investment of training of operators in Italy will be substantial.

Work flow improvements made possible by the automation will allow the company to reduce the amount currently invested in inventory on hand by $300,000 and these funds will be freed up in the first month of operation. The CEO was delighted about the unexpected cash flow bonus. To be conservative, the CEO has decided to ignore any benefits that may be derived from increased annual throughput resulting from the automation in her initial calculations. Robinson has set a rate of return for similar new investments of 14%.

Robinson has pulled together a list of items that need to be considered. They have asked you to assist in pulling together a report .

Investment in machinery: $2,100,000

Installation of equipment: $400,000

Operator training and travel cost: $300,000

Annual savings in labor costs: (calculate)

Annual savings in inventory carrying costs: $190,000

Annual allocated fixed costs: $250,000

Monthly increase in power and maintenance costs: $2,500

Salvage value in 12 years: $90,000

Useful life: 12 years

Calculate the following:

1) Net annual cost savings if the investment in the machinery is made

2) The net present value of the proposed investment in the machinery and a recommendation based on the base case numbers

3) Sensitivity analysis with more conservative numbers:

- training costs are $25,000 more than estimated

-installation costs are $100,000 more than estimated

- direct labor is reduced by only 17,500 hours per year

a) Under the scenario above, should the company proceed with the automation? show calculations

b) calculate net cash inflow resulting from increased throughput that owuld be needed each year in order for the equipment to yield a 20% rate of return