Ayayai Company manufactures automobile components for the worldwide market. The company has three large production facilities in Virginia, New Jersey, and California, which have been operating for many years. Brett Harker, vice president of production, believes it is time to upgrade operations by implementing computer-integrated manufacturing (CIM) at one of the plants. Brett has asked corporate controller Connie Carson to gather information about the costs and benefits of implementing CIM. Carson has gathered the following data: Initial equipment cost $6,006,000
Working capital required at start-up $600,600
Salvage value of existing equipment $75,075
Annual operating cost savings $840,840
Salvage value of new equipment at end of its useful life$200,200
Working capital released at end of its useful life $600,600
Useful life of equipment 10 years
Ayayai Company uses a 12% discount rate.
1. Calculate the net present value of Ayayai’s proposed investment in CIM.
2. Use Excel or a similar spreadsheet application to calculate the internal rate of return on Ayayai’s proposed investment.
3. Andrew Burr, manager of the Virginia plant, has been looking over Carson’s information and believes she has missed some important benefits of implementing CIM. Burr believes that implementing CIM will reduce scrap and rework costs by $150,150 per year. The CIM equipment will take up less floor space in the factory than the old equipment, freeing up 6,000 square feet of space for a planned new research facility. Initial plans called for renting additional space for the new facility, at a cost of $20.02 per square foot. Calculate a revised net present value and internal rate of return using this additional information.
NPV?
IRR?
Does your recommendation change as a result of this new information?