Question
In: Accounting
Saxon Products, Inc., is investigating the purchase of a robot for use on the company’s assembly...
Saxon Products, Inc., is investigating the purchase of a robot for use on the company’s assembly line. Selected data relating to the robot are provided below:
| Cost of the robot | $ | 1,900,000 | |
| Installation and software | $ | 480,000 | |
| Annual savings in inventory carrying costs | $ | 216,000 | |
| Annual increase in power and maintenance costs | $ | 36,000 | |
| Salvage value in 5 years | $ | 76,000 | |
| Useful life | 5 | years | |
Engineering studies suggest that use of the robot will result in a savings of 31,000 direct labor-hours each year. The labor rate is $18 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 $406,000. 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 23% required rate of return.
Click here to view Exhibit 13B-1 and Exhibit 13B-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 $406,000 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 $81,000 more than estimated and direct labor could only be reduced by 25,500 hours per year, rather than the original estimate of 31,000 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 (a) above for the automated equipment to yield a 23% rate of return.
Garrison 16e Rechecks 2017-11-15
Solutions
Expert Solution
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| Saxon Products, Inc. | ||
| Workings for Answer 1 | ||
| Savings in labor cost | Amount $ | Note |
| Direct labor-hours | 31,000.00 | K |
| Labor-hour rate | 18.00 | L |
| Savings in labor cost | 558,000.00 | M=K*L |
| Answer 1 | Amount $ | Note |
| Savings in inventory carrying costs | 216,000.00 | |
| Add: Savings in labor cost | 558,000.00 | See M |
| Less: Increase in power and maintenance costs | 36,000.00 | |
| Annual net cost saving | 738,000.00 | E |
| Answer 2-a | Y0 | Y1 | Y2 | Y3 | Y4 | Y5 | Note |
| Cost of equipment | (1,900,000.00) | - | - | - | - | - | A |
| Installation and software | (480,000.00) | - | - | - | - | - | B |
| Salvage Value | - | - | - | - | - | 76,000.00 | D |
| Annual net cost saving | - | 738,000.00 | 738,000.00 | 738,000.00 | 738,000.00 | 738,000.00 | E |
| Reduction in the inventory on hand | - | 406,000.00 | - | - | - | - | G |
| Net cash flows | (2,380,000.00) | 1,144,000.00 | 738,000.00 | 738,000.00 | 738,000.00 | 814,000.00 | H= Sum of A to G |
| PV factor at 23% | 1.00 | 0.813 | 0.661 | 0.537 | 0.437 | 0.355 | I |
| PV of Net cash flows | (2,380,000.00) | 930,081.30 | 487,804.88 | 396,589.33 | 322,430.35 | 289,133.79 | J=H*I |
| NPV | 46,039.65 | Sum of J |
| Answer 2-b |
| NPV is positive $ 46,039.65 so yes the robot should be purchased. |
| Workings for Answer 3-a | ||
| Savings in labor cost | Amount $ | Note |
| Direct labor-hours | 25,500.00 | N |
| Labor-hour rate | 18.00 | O |
| Savings in labor cost | 459,000.00 | P=N*O |
| Revised Annual net cost saving | Amount $ | Note |
| Savings in inventory carrying costs | 216,000.00 | |
| Add: Savings in labor cost | 459,000.00 | See P |
| Less: Increase in power and maintenance costs | 36,000.00 | |
| Annual net cost saving | 639,000.00 | E |
| Answer 3-a | Y0 | Y1 | Y2 | Y3 | Y4 | Y5 | Note |
| Cost of equipment | (1,900,000.00) | - | - | - | - | - | A |
| Installation and software | (561,000.00) | - | - | - | - | - | B |
| Salvage Value | - | - | - | - | - | 76,000.00 | D |
| Annual net cost saving | - | 639,000.00 | 639,000.00 | 639,000.00 | 639,000.00 | 639,000.00 | E |
| Reduction in the inventory on hand | - | 406,000.00 | - | - | - | - | G |
| Net cash flows | (2,461,000.00) | 1,045,000.00 | 639,000.00 | 639,000.00 | 639,000.00 | 715,000.00 | H= Sum of A to G |
| PV factor at 23% | 1.00 | 0.813 | 0.661 | 0.537 | 0.437 | 0.355 | I |
| PV of Net cash flows | (2,461,000.00) | 849,593.50 | 422,367.64 | 343,388.32 | 279,177.50 | 253,968.87 | J=H*I |
| NPV | (312,504.17) | Sum of J |
| Answer 3-b |
| Post audit NPV is negative $ 312,504.17 so yes no the company did not make a wise investment. |
| Answer 4-a |
| The intangible benefits are: |
| 1. Savings in time. Automation saves times. Company does not depend on the slack of workers. As manual intervention is minimum so company can save lot of time and use it productively. |
| 2. The output will increase because slack time will decrease. |
| 3. Quality of output may increase. |
| Answer 4-b |
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