Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The...

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Accounting

Gina Ripley, president of Dearing Company, is considering thepurchase of a computer-aided manufacturing system. The annual netcash benefits and savings associated with the system are describedas follows:
Decreased waste $300,000
Increased quality 400,000
Decrease in operating costs 600,000
Increase in on-time deliveries 200,000
The system will cost $9,000,000 and last 10 years. The companyâ€™scost of capital is 12 percent.
The present value tables provided in Exhibit 19B.1 and Exhibit19B.2 must be used to solve the following problems.
Required:
1. Calculate the payback period for thesystem.
years
Assume that the company has a policy of only accepting projectswith a payback of five years or less. Would the system beacquired?
No
2. Calculate the NPV and IRR for the project.Round your IRR answers to the nearest whole percentage value (forexample, 15.6% rounds to 16% and should be entered as \"16\" in theanswer box). If the NPV is negative, enter your answer as anegative value.
NPV: $
IRR: Between % and %
Should the system be purchasedâ€”even if it does not meet thepayback criterion?
Yes
3. The project manager reviewed the projectedcash flows and pointed out that two items had been missed. First,the system would have a salvage value, net of any tax effects, of$1,000,000 at the end of 10 years. Second, the increased qualityand delivery performance would allow the company to increase itsmarket share by 20 percent. This would produce an additional annualnet benefit of $300,000. Recalculate the payback period, NPV, andIRR given this new information. (For the IRR computation, initiallyignore salvage value.) Round your IRR answers to the nearest wholepercentage value (for example, 15.6% rounds to 16% and should beentered as \"16\" in the answer box). If the NPV is negative, enteryour answer as a negative value.
Payback period: years
NPV: $
IRR: Between % and %
Does the decision change?
Yes
Suppose that the salvage value is only half what is projected.Does this make a difference in the outcome? Does the salvage valuehave any real bearing on the company's decision?
No - in this case the decrease in salvage value is not enough tochange the decision

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1. Payback Period

Investment	a	$Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 9,000,000
Annual Net cash Flow	b	$Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 1,500,000

Payback Period	a/b	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 6	Years

NO

2. NPV

Year	Cash Flow	Discount Factor 12%,n=10	PV

Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â -Â Â	$-9,000,000	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 1.000	$ -9,000,000
1-10	$ 1,500,000	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 5.650	$ 8,475,000
Net Present Value			$Â Â Â -525,000

IRR:

Period		10 Years
Discount Factor ($9,000,000/$1,500,000)		Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 6.00

Searching table for 10 Year, 6%		10.56%
Hence IRR will be between 10 and 11%

NO

Part 3

a. Payback Period

Investment	a	$Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 9,000,000
Annual Net cash Flow	b	$Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 1,800,000

Payback Period	a/b	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 5	Years

b. NPV

Year	Cash Flow	Discount Factor 12%,n=10	PV

Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â -Â Â	$-9,000,000	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 1.000	$ -9,000,000
1-10	$ 1,800,000	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 5.650	$10,170,000
10	$ 1,000,000	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.322	$Â Â Â Â 322,000
Net Present Value			$ 1,492,000

IRR:

Period		10 Years
Discount Factor ($9,000,000/$1,500,000)		Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 6.00

Searching table for 10 Year, 6%		10.56%
Hence IRR will be between 15 and 16%	16%

Yes
NO

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Decreased waste	$300,000
Increased quality	400,000
Decrease in operating costs	600,000
Increase in on-time deliveries	200,000

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