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 1 year ago

Next > < Previous

Related Solutions

Your company is considering the purchase of a new production system with an installed cost of...

Your company is considering the purchase of a new production system with an installed cost of $1,250,000. The cost will be depreciated on a straight-line basis to zero over the five-year life of the project, and the system can be sold at the end of the project for $225,000. It will provide additional revenue of $685,000 in the first year, and the additional revenue is expected to grow 5% per year thereafter. The associated cost of goods sold is estimated...

Amazon, Inc. is planning to purchase a Hybrid Truck for $500,000. The annual cash savings for...

Amazon, Inc. is planning to purchase a Hybrid Truck for $500,000. The annual cash savings for the next 6 years is estimated to be $100,000 for the next 6 years. The salvage value of the truck at the end of the seventh year estimated to be $50,000. Assume that the required rate of return is 8%. Based on your calculations Would you approve the purchase based on NPV? What would be your decision about this investment if the internal rate...

Newman Manufacturing is considering a cash purchase of the stock of Grips Tool. During the year...

Newman Manufacturing is considering a cash purchase of the stock of Grips Tool. During the year just completed, Grips earned $3.58 per share and paid cash dividends of $1.88 per share (D0=$1.88). Grips' earnings and dividends are expected to grow at 35% per year for the next three years, after which they are expected to grow at 8% per year to infinity. What is the maximum price per share that Newman should pay for Grips if it has a required...

Newman Manufacturing is considering a cash purchase of the stock of Grips Tool. During the year...

Newman Manufacturing is considering a cash purchase of the stock of Grips Tool. During the year just completed, Grips earned$3.58per share and paid cash dividends of$1.88per share(D0=$ 1.88$).Grips' earnings and dividends are expected to grow at 40%per year for the next 3 years, after which they are expected to grow 6% per year to infinity. What is the maximum price per share that Newman should pay for Grips if it has a required return of15%on investments with risk characteristics similar...

(Calculating project cash flows and NPV) Raymobile Motors is considering the purchase of a new production...

(Calculating project cash flows and NPV) Raymobile Motors is considering the purchase of a new production machine for $350,000.The purchase of this machine will result in an increase in earnings before interest and taxes of $ 200,000 per year. To operate this machine properly, workers would have to go through a brief training session that would cost $22,000 after tax. In addition, it would cost $4,500 after tax to install this machine correctly. Also, because this machine is extremely...

(Calculating project cash flows and NPV) Raymobile Motors is considering the purchase of a new production...

(Calculating project cash flows and NPV) Raymobile Motors is considering the purchase of a new production machine for $ 550,000. The purchase of this machine will result in an increase in earnings before interest and taxes of $ 100,000 per year. To operate this machine properly, workers would have to go through a brief training session that would cost $ $26,000 after tax. In addition, it would cost $ 6,000 after tax to install this machine correctly. Also, because...

The annual production of a manufacturing company that produces generators follows a normal distribution with a...

The annual production of a manufacturing company that produces generators follows a normal distribution with a mean µ=1200 and standard deviation σ=100. 1) The shading area for the probability between 1100 and 1300 units is? 2) The probability of producing between 1100 and 1350 units is ? 3) The probability of producing less than 1200 units is? 4) The probability of producing between 1200 and 1350 units is . 5) A student intends to measure the boiling temperature of a...

“MLK Co” is a manufacturing company which is considering the purchase of a new equipment. The...

“MLK Co” is a manufacturing company which is considering the purchase of a new equipment. The below given summarizes all the information related to the equipment: -Equipment’s price: $180,000 -Shipping: $20,000 -Payment to find a good place to install the equipment: $30,000 -Useful Life : 4 years -Depreciation Method: MACRS – 3 year class -Total Revenues/ year: $100,000 -Operating costs (Excluding Depreciation)/year: $25,000 -Salvage Value: $10,000 -Increase in Current Asset: $23,000 -Increase in Current liabilities (Except N/P): $8,000 -WACC: 9%...

A company is considering the purchase of a major piece of equipment for its manufacturing plant....

A company is considering the purchase of a major piece of equipment for its manufacturing plant. The project would cost $22m in initial investment and would result in cost savings, before tax, of $3.25m per year for five years. The equipment could be sold for $4.5m at the end of the five years. The equipment would also result in an increase in NWC of $500,000, which will be recovered at the end of the project. The company’s CCA rate is...

A company is considering the purchase of a major piece of equipment for its manufacturing plant....

Subjects