Question

In: Accounting

Barker Production Company is considering the purchase of a flexible manufacturing system. The annual cash benefits/savings...

Barker Production Company is considering the purchase of a flexible manufacturing system. The annual cash benefits/savings associated with the system are: Decreased waste $ 75,000 Increased quality 100,000 Decrease in operating costs 62,500 Increase in on-time deliveries 12,500 The system will cost $750,000 and will last ten years. The company's cost of capital is 10%.

Required:

A. What is the payback period for the flexible manufacturing system?

B. What is the NPV for the flexible manufacturing system?

Solutions

Expert Solution

A. Compute the payback period for the flexible manufacturing system:

Payback period = Initial Investment   Annual cash inflows

Compute Annual cash inflow or savings:

Amount
Decreased waste $75,000
Increased quality $100,000
Decrease in operating cost $62,500
Increase on time deliveries $12,500
Total Annual cash inflows $250,000

Payback period = Initial Investment   Annual cash inflows

= $750,000 $250,000

= 3 years

______________________________________________________

B. Compute the NPV for the flexible manufacturing system:

PVAF(10%, 10 years) = 6.14456

NPV = [(Annual cash inflows   PVAF(10%, 10)] - Initial Investment

= [($250,000 6.14456) - $750,000

= $1536140 - $750000

= $786,140

ekkarill92 answered 2 years ago
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